Obamacare tax pitfalls: Two scenarios for those whose income changes

Kathleen O'Brien/The Star-Ledger writes:  Accountant William McDevitt, of East Brunswick-based firm Wilkin & Guttenplan, gives seminars about the Affordable Care Act to groups of attorneys and physicians. He crunched the numbers for two hypothetical scenarios of people who may apply for Obamacare and who have fluctuating income.

Q. Let’s say you’re a single, 27-year-old who works at a pizzeria. At the time you apply for Obamacare, you’re making $15,900 a year. Halfway through 2014, you land a job as a graphics artist that doesn’t have benefits, but you double your salary to $31,800. Thrilled by your change of fortune, you forget to update the federal insurance website. What financial impact will that have?

A. Someone who works half a year at $15,900 and half a year at $31,800 will end up with an annual income of $23,850.

His insurance would cost $3,125, for which the government would advance him a subsidy of $2,598.

Once he got the better job and boosted his annual earnings, he’d no longer qualify for the $2,598 subsidy. Instead, he’d qualify for a subsidy of only $1,559.

So he ended up receiving an extra $1,039 in subsidy. (That is $2,598 minus $1,559.)

In this income range, anything up to $1,500 has to be paid back through the annual tax filing. Since his undeserved $1,039 fell below the cap, he’d have to pay it all back — either coming out of the refund (if it’s big enough) or through a check sent to the feds.

Q. Let’s say you’re a single, 27-year-old auto body mechanic who makes $30,000, with no insurance from your employer. Your boss has been talking about cutting everyone’s hours, so when you apply for Obamacare, you estimate your 2014 income will drop to $15,900. However, your boss never makes good on his threats, so your income stays at $30,000. How does that play out?

A. In this case, the income number you plugged into the application results in a subsidy of $2,598.

Come tax time, you have to tell the government you actually made nearly double that. As a consequence, it lowers the subsidy for which you qualified, dropping it to just $614.

That means you received $1,984 more in subsidies than you ultimately were entitled to.

However, there is that $1,500 cap on how much someone in your income range would have to pay back. So that $1,500 would come out of your refund, if it were large enough. If it weren’t, it would go on your tax bill.

Because of the cap, however, you end up getting $484 in undeserved subsidies that you don’t need to pay back.

Both scenarios show the financial consequences of not informing the government of any large swing in income.

McDevitt says recipients of Obamacare subsidies will fare best if they update their income quickly. "Otherwise, they’re going to have a rude surprise," he said.