Obamacare-refund-versus-repayment-tax-credits

Psychology, Loopholes, and Other Considerations in Regards to the Affordable Care Act

Do you take more than you need and pay it back, or do you risk missing out on advanced credits? Either way, it’s as much tax strategy as it is psychology.

I guess we have to ask, “can you make smart choices now, knowing that you might have a bad experince a year and a half later”? If so, how many of the 320 million other Americans do you think are in your shoes?

Not everyone is in this situation, but once you see what i’m getting at, you’ll be like, “WTF?!”

FACT: Everyone loves a refund, everyone loves an upfront tax credit, no one likes repaying money, no one likes forms, and many don’t feel comfortable taking large loans from the federal government for high deductible coverage. How do we address this?

TIP: We cover the major ACA sticking points here, but there are a few minor ones that are causing minor havoc. This of course, must be said along side acknowledging the ACA success stories, tens of millions with coverage, decreased long-term spending in some areas, and general progress. The ACA is working, but as someone who actually cares, it is my duty to critique. Now that we gave a nod to what the legislation got right, let us complain about some things it got wrong.

When Greed is Good: The Advanced Tax Credit

I’m going to come right out and say it, for those making less than 400% FPL, financially speaking, you are better off being an “advanced tax credit hog” and then paying back the IRS as needed, than you are being “conservative”, and only taking credits at the end of the year.

This is especially true if you are self employed, take contracts, or have income you can’t predict.

In one “hilarious” example, a self-employed gentlemen paid his full premiums all year thinking that he would get payment from a big contract in December. Payment didn’t come until after the 1st of January, and given this, his income for the previous year was about $5,000. This means he qualified for Medicaid the whole year, for free. Had he projected say “110%” FPL he would have gotten nearly free coverage through the marketplace after tax credits and out-of-pocket subsidies (100% a legal and legitimate thing to project in his shoes).

Had the payment come in in December, oh well, so he pays back the part of the tax credit he owed (cost sharing isn’t owed back). No big deal. The IRS only wants the full amount back if you go over 400% FPL, otherwise limits are reasonable. (see repayment limits)

On the flip side, go below 100% and the IRS doesn’t even care if you file taxes (as you are below the tax filing threshold). We can’t expect such things out of those with low incomes… but then this calls into question the difference between wealth and income

It gets even more “hilarious” though, because we haven’t factored in one of the top complaints I get running ObamaCareFacts.com, “people pissed off about repaying tax credits” (most others are 1095-A forms, ideology, employer coverage, and costs).

You see, psychologically, the really mad ones, are the ones who “advanced tax credit tax hogged” and now are being asked to pay money back. They are MAD and vocal… and they are the ones who made the smart move the other gentlemen didn’t.

This is to say, both those making the right and wrong move are upset?!

Repayment limits for 2014 coverage (about the same as 2015).

Repayment limits for 2014 coverage (about the same as 2015).

The Negative Psychology of Repayment (and the Positive Psychology of Refund)

Ask any social psychologist if advanced tax credit repayment is a good idea, and they will tell you, “no”. Or, “no, are you nuts, have you listened to anything we said about bias or perception for the past century… are you seriously asking me this?” Or, something like that.

There is a lot of positive psychology in a refund, and some people get refunds, but repayment actually eats in to people’s overarching refund about 1/2 the time, and these people tend to be more vocal.

I can see how this would seem to work on paper, but in practice people don’t understand the ACA in regards to refunds or repayment. When a person gets a year-end bill to repay the $3,000 they borrowed, they aren’t seeing it as a loan. They see it as the government taking their money. When they get a refund, well, they overpaid and it is on to the next thing.

This is made worse by high deductibles and insurance people feel like they aren’t using. So while the mechanics aren’t broke mathematically speaking, when we factor in the human condition, we see a glaring problem.

In Truth, on Paper, This is All Fair

In truth, advanced tax credits are a smart and fair system that favors the user, the government, and the industry. The faults of this aspect are largely just psychological (negative for under- and over-taking) and incentive-based (it incentivizes “hogging” and disincentives thrift).

The system incentivizes borrowing tax credits from the government, which get paid to insurers today, for coverage today.

A year and a half later when taxes are owed people no longer feel the “value” of their coverage or loan, and instead are just pissed about owing money or not taking enough up-front. This is only made worse by large deductibles that people don’t use unless they have a catastrophic accident.

Would someone making $40,000 a year really want to spend $3,500 on coverage if it wasn’t subsidized? How can you get someone to value you that? This is largely an issue of psychology over economics.

Tax Tips For Avoiding the Repayment Blues

I haven’t yet, and will not, write a “grey-hat ObamaCare tax tips” page, but if I did, let’s just say it wouldn’t be blank. (see our white-hat tax tips and white-hat subsidy tips pages)

I am a blogger, and our team helps people understand the ACA, we aren’t “insiders” and we aren’t beholden to a party or industry.

In our years of studying the law and helping people, a few sticking points have popped up. This is one glaring sticking point.

I can understand legislation making flubs and needing reform, I can imagine Gruber wiping the sweat from his brow attempting to please all parties and get health reform passed, but I’m missing the part where rooms of smart people are zero’d in on the ACA in the interest of reforming it for the people.

If that is happening, then dear room full of people, “consider the psychology of advanced tax credit repayments”, “consider the psychology of deductibles”, and also, “consider the psychology of low-income employee plans costing more than everyone else”.

In truth, a lot of the ACA sticking points are psychological, sometimes that is even the psychology of a drug company who jacked up the price of a drug… but hey, one topic at a time right?

TIP: The rejection of Medicaid and the expansion of pre-existing conditions are also having odd effects. Lots of negative psychological effects on people who pay more, but a lack of vocalization on behalf of those who benefit. Is it that negative effects are more powerful, what can we learn here?

What do you think?

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katie on

I think this is total BS. Due to the fact that my husband makes decent money we have to spend an outrageous amount of money on Health Insurance for our family. To be exact we pay $12,000 a year for myself and 2 children to be on his health Insurance through his employer. I have been looking on the marketplace and it is going to cost me the same thing to have okay insurance but if he made half of what he makes we would get financial help. Why do we get penalized for being hard working, law abiding, tax paying citizens?

Lisa F on

I COULD NOT AGREE MORE. My husband and I run a small business, and we, too, must pay outrageous amounts of money for Health Insurance; all the while knowing that: 1) We are subsidizing people who don’t even WANT health insurance, and 2) God only knows what the government is actually doing with all of the money they collect, directly or indirectly, related to health insurance premiums.

Thank you, God, for finally putting a man with some cajones in our Presidential office!! Life for middle-and high-income brackets is about to become much fairer.

We have always wondered your exact question: Why do we get penalized for being hard working, law abiding, tax paying citizens? My answer: The democrats are doing everything they can to socialize this country. Read a bit on the ObamaCare website about subsidies–They COMPLETELY, and subversively, converted our heathcare (from #1 spot in the world of healthcare) to socialized medicine. SHAME, SHAME, SHAME. If one is going to make such significant transformations in ANY law or area of government, then one should be completely transparent in doing so.

Last Comment: Do you REALLY believe that the astounding amount of confusion regarding Sociopath…er, ObamaCare was UNINTENTIONAL???

John Henry on

This system is broken! I find myself in the position of owing 100% of the money initially credited to me because my business had an unexpected windfall in October of 2015. My wife and I are in our 50’s and self-employed and based on our 2014 income we were expecting to make about $45,000 jointly in 2015. We opted for the cheapest “Bronze” coverage with the highest deductible because we rarely get sick and were required to have some kind of coverage or face penalties, In our area that coverage costs $913 per month! Not cheap, but with the expected tax credit we figured it was affordable. I unexpectedly was able to sell a business asset in October 2015 which put our joint AGI at $66,000, about $4000 over the 401% payback threshold. We were shocked to find that we now owe all of the $9000 advanced to us back to the government! What we had hoped would help towards retirement now goes back to the government. Since when is being forced to pay 16% of your annual income for unwanted or unused health insurance “fair” or “affordable”! We’ll be digging into our retirement funds to pay the bill. I’m sure there are many other people in a similar situation. This system needs to change!

Vicki on

Us to…..except we owe $13,000 and we have to go into our retirement to pay it and guess what….that $13,000 looks like income to the IRS so everything goes up for next year. Premiums, deductibles etc…. we live on SS and disability and retirement as needed. My husband had a liver transplant this year and after the $8,000 ded ( which of course came from retirement) and all the expense for travel and lodging for Emory Hospital for 9 months which again came out of retirement this year, it looks like we are screwed for next year. I hate this system……and feel like retirement should not be considered income…….it should be based on earned income.

Ryan on

Since I am self-employed, if I underestimate my income and have to pay back my subsides at tax time, am I allowed to deduct that repayment amount from my self-employed insurance premiums (form 1040 line 29)?

So for example, let’s say my insurance premiums cost $100 a month and the subsidy is $50. I’m paying $50 a month out of my pocket (or $600 a year). If I get to the end of the year and find out my income is too high for any subsidy, and I’m forced to pay back my subsidy of $600, can I deduct the entire $1200 for tax purposes? Or just the $600 I paid throughout the year?

The line of work I’m it makes it almost impossible to estimate income, and can even result in negative income. I’ve been paying the full premium amount for the last few years, with no subsidy assistance since my income is usually too high. But I don’t want to fall into the trap of where I pay the full premium amount, then possibly report negative income for the year, and then can’t recoup any money since I’d fall below 100% of the poverty line.

Thanks.

Kim on

I would love to know the answer to Ryan’s question too. Thanks!

ObamaCareFacts.com on

Great question. I’m not 100% sure. If anyone figures that out i’d love to have the answer here.

MY THOUGHTS: Noting that I don’t know. Here are some thoughts. I would assume no. If the government gives you $600 and then you give $600 back then the net effect is $0 and thus there is nothing to deduct. Still, from an investors standpoint, you are sort of better off with money up front even if you owe it all back (as the person who holds capital for a year and half until tax time can use it, and that is a benefit). From an accounting and psychological standpoint… probably better off not taking the money as its hard to mentally prepare for paying back credits. I can’t see how taking too many tax credits could be an official tax advantage though.

joe Roma on

Ryan, I don’t know if you already got an answer to your question but I just did a test run of my tax return using H&R Block software and it allowed me to deduct as self-employed insurance premium all the repayment money which in case was all the subsidy (I am not an accountant so I am not giving any professional advise, just sharing my experience). This helps some of the financial pain but it seems grossly unfair to be penalized for unexpected changes. In my case I had ACA coverage for only 3 months since I turned 65 in April and then had to start using Medicare. My income unexpectedly increased significantly in August, 4 months after being off ACA coverage, and I had to unexpectedly take some money out of my IRA in December that pushed to where I didn’t qualify for any subsidy. Bottom line is that it is an extremely unfair and punitive system when expected income changes occur.

Tito J on

Just to make sure I understand. If someone estimates that their income will be over the amount required to get the healthcare credit applied but then they make less than 10,000 for that year then their max repayment penalty is $300?

tracy on

Anger at subsidy payback psychological? Look, I have wracked up 6K in medical debt in the last 2 years, upwards of 10K over the last three (I paid some of it off) because the deductibles are so high and nothing is ever covered or is subject to the deductible so to my family, not covered. If I get the bonus I worked my butt off for, that would help pay off the debt and give my family some breathing room, I have to pay every dime of it to pay back the subsidy. I’m telling my boss to keep it.

The premium for 3 people with these out sized deductibles is $2,195. per month before the subsidy. With the subsidy, we are still paying way more than 8% of income. Most of us getting the subsidy actually qualify for an exemption because it’s not affordable if over 8% of income. With subsidy, we are at about 13% of income, not counting what we pay monthly towards the medical debt. So, according to this law, IT IS NOT AFFORDABLE!!!

And lastly, folks at 100% or less of poverty level, you said they don’t have to file taxes, oh yes they do. They won’t get the medicaid without it. I just had the subsidy yanked MIDTERM AND WITHOUT MORE THAN 10 DAYS NOTICE effective 11/1 because the exchange says the IRS did not notify them that I filed my taxes. After 11 hours on the phone with the exchange over 3 days I am now told I get to spend God knows how much time on the phone with the IRS to get this done, meanwhile, it’s open enrollment and I can’t enroll unless I enroll in a subsidy free policy and pony up 3K for November and December.

Since this sucker was laid down upon our family, I have lost countless work hours on the phone dealing with bureaucratic mistake after mistake after mistake, our insurance and finances ALWAYS hanging in the balance. I have NOTHING good to say about it and it is NOT working at all for a heck of a lot of us who are sick and tired of hearing about how more people have insurance – no, more people are paying legally forced extortion with premiums over the 8% of income level and deductibles so high you are still effectively uninsured. And please, don’t tell me at least my screening exams are free – they are only free if they don’t find anything. Got a polyp, now it’s diagnostic and you pay full price because a colonoscopy runs about $2,500 and the deductible is $3,500. A big fat joke and a bit of a dirty trick if you ask me.

tracy burgess on

Anger at subsidy payback psychological? Look, I have wracked up 6K in medical debt in the last 2 years, upwards of 10K over the last three (I paid some of it off) because the deductibles are so high and nothing is ever covered or is subject to the deductible so to my family, not covered. If I get the bonus I worked my butt off for, that would help pay off the debt and give my family some breathing room, I have to pay every dime of it to pay back the subsidy. I’m telling my boss to keep it.

The premium for 3 people with these out sized deductibles is $2,195. per month before the subsidy. With the subsidy, we are still paying way more than 8% of income. Most of us getting the subsidy actually qualify for an exemption because it’s not affordable if over 8% of income. With subsidy, we are at about 13% of income, not counting what we pay monthly towards the medical debt. So, according to this law, IT IS NOT AFFORDABLE!!!

And lastly, folks at 100% or less of poverty level, you said they don’t have to file taxes, oh yes they do. They won’t get the medicaid without it. I just had the subsidy yanked MIDTERM AND WITHOUT MORE THAN 10 DAYS NOTICE effective 11/1 because the exchange says the IRS did not notify them that I filed my taxes. After 11 hours on the phone with the exchange over 3 days I am now told I get to spend God knows how much time on the phone with the IRS to get this done, meanwhile, it’s open enrollment and I can’t enroll unless I enroll in a subsidy free policy and pony up 3K for November and December.

Since this sucker was laid down upon our family, I have lost countless work hours on the phone dealing with bureaucratic mistake after mistake after mistake, our insurance and finances ALWAYS hanging in the balance. I have NOTHING good to say about it and it is NOT working at all for a heck of a lot of us who are sick and tired of hearing about how more people have insurance – no, more people are paying legally forced extortion with premiums over the 8% of income level and deductibles so high you are still effectively uninsured. And please, don’t tell me at least my screening exams are free – they are only free if they don’t find anything. Got a polyp, now it’s diagnostic and you pay full price because a colonoscopy runs about $2,500 and the deductible is $3,500. A big fat joke and a bit of a dirty trick if you ask me.

Cindy on

When we signed up for obamacare we were never asked if there was employer sponsored insurance, so according to obamacare we qualified for tax credits. Then come to find out in July they were going to make employer help pay for what we were getting. We received 2600 in tax credits, and had to drop obamacare and cant afford the insurance through work, so getting fine for the rest of year. How are we supposed to pay that back???? And how is this fair.

Alice Hutchings on

My daughter makes less than 20thousand a year. She paid the premiums quoted but after filing income taxes they took over $600 from her refund. Why?

Erin on

It depends on a lot of more specific details that your daughter should seek advice from an IRS taxpayer advocate to discuss her specific case. It may have been in error and an advocate can help her file an amended return or guide her on how to correct it. Here is more online Tax Payer Advocate resources.
Some people are simply misinformed/unaware that they are not eligible for Premium Tax Credits, like people who are claimed as dependents on another persons tax return. Dependents need to get health insurance through the person claiming them and the person claiming them will owe the fee if dependents are not covered. Another example is if the tax family is offered affordable minimal essential coverage through a spouse’s employer.