California couple must repay almost $13,000 in Obamacare advance premium tax credits

Medical insurance word cloud graphic by Shawn Campbell via Flickr Creative Commons

Shawn Campbell via Flickr Creative Commons

As the health care battle on Capitol Hill continues, there’s one thing upon which both side can agree. The Affordable Care Act is not perfect.

No piece of legislation is. Just ask Republicans trying to craft a replacement for Obamacare, as the seven-year-old health care law is known.

And just ask a California couple who now owe the Internal Revenue Service almost $13,000 because of miscalculated Obamacare advance premium payments.

Premium tax credit help: The Walkers, a married California couple, got health care coverage in 2014 though one of the Golden State’s insurance marketplaces. They met the ACA’s coverage requirement by having the policy for the full year.

But to do so, they also got tax subsidy help to pay the monthly premium of almost $1,400. They opted, as many folks do, for the monthly advance premium tax credit (APTC) to go to the insurer. That covered almost 80 percent of the policy’s premium.

That, according to Obamacare supporters, is how the system is supposed to work.

But it works only if you qualify for the law’s premium financial assistance.

The Walkers unfortunately did not.

ACA credit confusion: They discovered the ACA subsidy problem when they filed their 2014 tax return and had to reconcile the APTC payments, which totaled $12,924.

For folks who don’t have to deal with this, the process entails the data found/entered on Form 1095-A, Health Insurance Marketplace Statement, and a Form 8962, Premium Tax Credit (PTC).

Basically, a taxpayer generally qualifies for the PTC if [s]he has household income that is equal to an amount that is at least 100 percent, but not greater than 400 percent, of the federal poverty line amount for the taxpayer’s family size for the taxable year.

When a taxpayer gets the subsidy as an advance payment directly to the insurer, the taxpayer must reconcile any APTC payments made during the year with the amount of premium credit for which [s]he is actually eligible. If the total APTC payments are more than the eligible PTC amount, then the taxpayer owes the excess as part of his/her annual tax liability.

That’s what happened to the Walkers.

When the couple filed their tax return, their modified adjustable gross income (MAGI) exceeded the tax year’s federal poverty limits. That meant the Walkers’ APTC payments should not have been allowed and the IRS demanded that they pay them back.

Bad tax counsel doesn’t fly: The Walkers decided to fight the IRS tax credit repayment order in U.S. Tax Court.

Part of the Walkers’ argument in contesting the IRS repayment demand, which also included an accuracy-related penalty of $2,584 in addition to the $12,924 in erroneous ACA subsidies, was that they got bad advice regarding the APTC.

They said in their U.S. Tax Court filing that they had been told by Covered California marketplace representatives that they qualified for subsidy assisted insurance coverage.

If they had known that was not the case, the Walkers said they would not have purchased insurance they did.

The Tax Court took that into account, noting in the decision:

“We note that it appears that Covered California may have incorrectly informed petitioners that they were eligible for the APTC for 2014. We are not unsympathetic to petitioners’ plight; however, we are bound by the statute as written and the accompanying regulations when consistent therewith. … The simple facts are that petitioners’ MAGI exceeded eligible levels and that they must repay the APTC payments made on their behalf.”

And based on the law, advice notwithstanding, the U.S. Tax Court Chief Special Trial Judge Peter J. Panuthosup upheld the IRS’ determination of the APTC tax owed by the Walkers.

ACA tax credit changes, maybe: CPA Joe Kristan, whose Tweet was the first mention I saw of this case, notes that this is the first such ACA APTC case he’s seen. But, he notes, “it won’t be the last.”

The Republican-controlled Congress could have a say in that prediction.

The Senate today (July 13, 2017) released its revised-yet-again proposal to repeal and replace the Affordable Care Act.

The latest version of the Better Care Reconciliation Act (BCRA), as the Senate bill is named, still contains cuts to Medicaid. It also retains its original provision that would allow states to opt out of key parts of Obamacare.

And, as far as individuals are concerned, BCRA also would repeal the requirement that individuals have approved health care coverage.

The elimination of that mandate also is part of the House-passed American Health Care Act (AHCA).

For folks who want to buy health insurance without being required to do so, they’d get less government help under the AHCA and BCRA.

The House plan would eliminate Obamacare’s refundable premium tax credits, which are based on a person’s income and cost of coverage in their area. Instead, the AHCA would provide refundable tax credits to help people buy health care coverage based mainly on the purchaser’s age.

The Senate’s BCRA also would provide similar age-related tax credits to individuals.

Whether these proposed replacement tax credits would make taxpayer compliance easier remains to be seen. I’m sure the Walkers and others in similar situations hope so.

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