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Covered California and Obamacare related questions from consumers, employers and agents are answered by Phil Daigle with the best information available at the time. Archived entries may no longer be accurate as the Covered California and Obamacare knowledge-base is evolving quickly. TO REQUEST A PERSONAL RESPONSE INCLUDE EMAIL ADDRESS.


Don't Want Big Tax Bill at the End of the Year?

By on | 9 Comments

Question: My wife and I are both self employed. We really have no idea of what our income will be in 2014. We based our application on our 2012 return; that all we can really do. Do they look at your returns each year and then adjust? Or send a bill? I am very worried about getting a large bill for a year past, that could break us. P.S. Our insurance costs have doubled from last year, for basically the same coverage. I am not a fan of Obamacare.

Answer: Covered California has access to your 2012 AGI from the IRS data hub. However, it is only a benchmark. If you feel that your 2014 income will be substantially more or less, use your 2014 estimate instead. To avoid the possibility of a big tax bill at the end of the year, you can choose to take only a percentage of your tax credit as a monthly advance. This step is in the online application just before selecting a health plan, if ignored it defaults to 100% advance tax credit monthly.

9 Comments

Client has negative magi so qualifies for medi-cal but has assets and does not want medi-cal, prefers a subsidized platinum plan. if client reports anticipated income on cc for 2014 to qualify for the subsidy, then files 2013 return with a negative magi what if anything will happen? if 2014 actual income reported is so much less that client would have qualified for medi-cal is he somehow penalized for taking a subsidized platinum plan instead of medi-cal?

The mortgage deduction and charitable deduction are absolutely the last in line in the list of possible deductions that can be eliminated. They haven’t even started with the deductibility of private jets. Even then those are being talked about only in the context of being revenue neutral.

You can get a good night’s sleep or toss and turn keeping awake worrying about the boogeyman under the bed. And this boogeyman goes all the way back to the Reagan administration and really has nothing to do with ACA.. and historically it’s been mostly the Republicans pushing for it. (Bush’s advisory panel, Connie Mack from Florida).

Realistically, they may meddle a bit such as capping the itemized deduction based on some indirect criteria — but a direct hit on Mortgage deduction is extremely unlikely.

We’ll see how much America “likes” Obamacare when Congress gets around to eliminating the mortgage interest deduction on primary residences and charitable contribution deductions to pay for the tax credits being doled out and massive increases in Medicaid/Medi-Cal payments which will result from the larger number of enrollments in that health-welfare program compared to paid health insurance plans for 2014. (Actuarially, it may be good that 2014 subsidized insurance enrollments are significantly lagging behind the initial enrollment projections, since this will substantially decrease credits refundable/payable in advance for TY 2014.)

Freelancer is absolutely correct.

We are a family of three; in our case crossing the 400% threshold will mean a difference of $7,542 for us. We are talking about an income difference of a few hundred dollars here (actually, even a couple of dollars). This is not an estimate or a theoretical number. This is the actual number.

But thankfully, there are ways to cushion yourself by adjusting/increasing your IRA contribution to stay within the limit. We have gone over this before in a different thread.. but it is worth going over again. This high claw back is especially critical for older couple.. and to match that their IRA limit is also higher. A 50+ couple can contribute $13K in IRA.

In addition, if you are self employed, you can do a SEP IRA, and squirrel away almost another 19% of income.

Also, all of your premium contribution is deductible off the top line for calculating AGI.

What’s more, you could choose a HSA compatible plan and knock off almost another $8K off your AGI.

In reality, for a family of three, you could be making $120K/year self-employed, and still get a fat subsidy. Or to put it another way, Uncle Sam will pay you to save for retirement, and guarantee you health insurance even if your kidney is failing.

Basically, Obamacare closes the gap between employer provided health insurance and the misery that used to be for self-employed.

You must be out of your mind to not “like” Obamacare.

Max wrote: “The maximum clawback for 2014 will be limited to just $1500.”

Where do you get that? You might want to review the applicable law and regulation here: http://www.law.cornell.edu/uscode/text/26/36B http://www.law.cornell.edu/cfr/text/26/1.36B-4

The $1500 limit applies only to households under 300% of the poverty line. (26 USC 36B(f)(2)(B))

The big tax bill — and it can be quite large for an older couple — comes into play when the income crosses the 400% threshold. That’s not all that much money - for a couple, it could be difference between earning $62,000 and $64,000 for the year.

For an older couple, the amount of subsidy can be substantial. (I’m single, age 59, and it would be well over $5000 if I took my full subsidy.)

Keep in mind that as a self-employed person, you can also adjust by increasing the amount paid with your quarterlies as needed. That might make sense for individuals with widely fluctuating incomes — for example, if your work tends to be seasonal, or you are paid on commission.

For example, let’s imagine a seasonal job where the bulk of income is earned during summer months. Money is slow from January -May, so it’s a big help to minimize the cost of health insurance that month. A lot of cash flows in during June-August — so that’s a good time to bank extra toward health insurance — but instead of changing income figures with Covered California, the earners can instead pay extra taxes in June and September. When October rolls around and earnings are down again, there is less pressure on the household budget with the lower (subsidized) premium - and by the time the final quarterly tax payment is due in January, the earners will have a much better sense their year’s income. If it turns out that they are entitle to their subsidy after all, when looking at the picture for the whole year, they might skip or reduce the last quarterly payment to compensate. If income is higher — they have paid the full amount well ahead of April— they just used the combination of the advance credit subsidy and their quarterly payment obligations to allow the timing of payments to better fit their earnings pattern.

In the end, IRS only cares about the year end totals, not when the money was earned, so no problem there. In theory Covered California wants people to report changes of income, but the system really isn’t set up to deal with people whose income fluctuates widely through the year. (Not much sense in reporting an increase in income during the summer when the seasonal earner knows that the income will be going down again in autumn).

I may be reading this incorrectly but it appears that you opted to report a lower income for 2014 so that you will be allowed to accept subsidies but now you are nervous that your real income will be much higher. I do agree that in some cases it is difficult to predict income (unless you are on a fixed pension, etc.) but you’re going to have to be realistic and also report changes as the year progresses. For example, my understanding is that let’s say you are having a banner 2014 and making lots of income then you need to report this to CoveredCA and not wait until the end of the year.

With all due respect, if you spend what you must and be aware of your liabilities, I don’t see how you can be “surprised” by a year end bill. But if you are in the habit of spending your entire “take home” pay, then it would be a problem.

It is not really rocket science. It is directly dependent on your income — unless you are also usually surprised by your own pay check.

Most of this follows directly from the “I am not a fan of Obamacare” mental block.

I don’t understand the “large bill” concept. What you owe the IRS is dependent on your net income from self-employment, not so much your premium tax credits. The maximum clawback for 2014 will be limited to just $1500.

If a self-employed person cannot reasonably estimate 2014 income at this time, then the only logical solution is to forego the advance tax credit payments in whole or in part, in the manner Phil described. If you choose not to take the credits in advance, they are fully refundable at tax filing time in 2015 — as long as you have purchased your health insurance through the exchange. And you would probably see a large refund instead of any amount of unpaid tax due.

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