Prepare for the “Claw Back” Credit

Is a tax surprise of over $1,000 in your future?

Millions of taxpayers may see a surprising tax bill in 2014 as the Federal government asks them to repay (claw back) some or all of the new health insurance Premium Tax Credit claimed on the Affordable Care Act insurance exchanges. Could this impact you or someone you know? If so, here is what you need to know.Background

A core part of the Affordable Care Act (ObamaCare) was the establishment of a Health Insurance Marketplace where the uninsured shop and sign up for health care insurance. Some states created their own online system while other states opted for the Federal website known as the Federally-facilitated Marketplace (FFM). When using the Marketplace, qualified participants could apply a new insurance Premium Tax Credit to reduce their health insurance bill. Millions of taxpayers are receiving this tax credit each month. The credit can be paid directly to health insurance companies to reduce monthly health insurance premiums.

The Insurance Premium Tax Credit ProblemPer a recent report from the Department of Health and Human Services, over 85% of the eight million participants who selected health insurance in the new Marketplace tool are using the new Premium Tax Credit to help pay their monthly premium. The qualifications to receive the tax credit are based on self-reported income. The contractor hired by the government to audit this information (Serco) is reporting over 4 million discrepancies between what is claimed on the insurance enrollment to qualify for the tax credit and what can be found in government records about these individuals. The problems consist of:

Avoid Mismatching income
Avoid Incorrect Social Security numbers
Avoid Residency and immigration problems
Avoid Conflicts with other federal health programs
Action StepsIf you are currently receiving your health insurance through these new exchanges and have been using the Premium Tax Credit to reduce your premium, please consider the following;

Check File a tax return. Many taxpayers that did not need to file a tax return in prior years must now do so to correctly establish qualifications to receive the Premium Tax Credit.
Check Confirm your health enrollment form. If you have been using the health insurance Premium Tax Credit, review your initial enrollment form. Is it still accurate? If not, please make the necessary corrections now. While it will not alleviate the need to repay some of the excess credit you received, it will help keep the tax credit repayment problem from getting any bigger over the balance of the year.
Check Changes in your situation. If you have any change in your situation, review and update your health insurance enrollment information. This includes, at minimum, a death, birth, marriage, or divorce in your family.
Check Plan for the claw back. You may wish to forecast your potential credit repayment risk. The recent government study shows that the current insurance Premium Tax Credits are reducing insurance premiums by 76% with a monthly tax credit of over $221. As an example, if an error is found on your application that requires a 50% repayment of the credit, you could face a federal claw back tax bill of over $1,300.

The government is currently trying to work through the reported inconsistencies on enrollment forms. Should you receive notice from the government please ask for help. The financial impact of waiting could cause an unpleasant surprise at tax time.