Many taxpayers are concerned a chaotic and confusing tax preparation season lies ahead in the wake of the Obama administration admitting it sent inaccurate tax information to 800,000 people who enrolled in and received tax credits through federal and state health insurance exchanges.
The blunder is a result of the Internal Revenue Service’s (IRS) miscalculation of the amount of subsidies taxpayers ought to be given to purchase health insurance on federal and state exchanges. The error could delay tax refunds for hundreds of thousands of Americans.
Devon Herrick, a senior fellow and health care researcher for the National Center for Policy Analysis, says the confusion is one reason why he and other health care policy experts prefer the idea of using simple, uniform tax credits for the purchase of health insurance instead of the Affordable Care Act’s (ACA) system of subsidies.
“The [ACA’s] system for determining subsidies is cumbersome and intrusive, and it shouldn’t have to be that way,” said Herrick. “A uniform tax credit would allow Americans to buy their coverage anywhere, including at work.”
Projecting Future Income Difficult
To receive a subsidy under the ACA, or Obamacare as it is more commonly known, individuals must first estimate future income for the year. The IRS then sends subsidies to insurance companies so eligible households can receive reduced premiums.
But if an individual’s income changes during the year, the IRS may wind up paying too much or too little to the insurance company, creating another difficulty on top of the inaccurate information sent by the IRS. Individuals will have to repay some or all of the cost of their subsidies if the IRS paid too much, and underpayments by the IRS could lead to a boost in tax refunds.
Many people have a difficult time accurately predicting their future income because they may gain or lose hours at work, get a new job that pays more, or earn a pay raise.
Greg Scandlen, a senior fellow at The Heartland Institute, which publishes Health Care News, and the founder and director of Consumers for Health Care Choices, says this latest blunder is further proof the IRS should be kept out of health care.
“The incorrect tax forms should not be surprising, because the IRS is simply not very good at running social policy,” Scandlen said. “The Earned Income Tax Credit is rife with errors and fraud. The adoption tax credit is even worse.”
Herrick says he is hopeful the blunder by the IRS could lead lawmakers to reconsider simple tax credits usable by anyone on or off of the Obamacare exchanges.
“If state subsidies in the federal marketplace are determined to be illegal [in King v. Burwell], states should ask for administrative simplification where residents get a tax credit they can use for any coverage in any market,” Herrick said.
Kenneth Artz ([email protected]) is a freelance writer for The Heartland Institute.