Health Insurance Now Tied To Taxes

This year's tax return could play a key role in your health insurance coverage starting next year.

The amount you earned last year will be used to help determine if you qualify for a government subsidy to purchase health insurance in 2014 under the new health care laws. If you don't have insurance in 2014, you'll pay a penalty, which will also be based on your 2012 income.

The Patient Protection and Affordable Care Act "will really change the landscape of how insurance will be procured and the way people look at their tax return," says Meg Sutton, senior adviser for tax and health care services with H&R Block.

Starting Jan. 1, nearly all Americans will have to have health insurance coverage as part of health reform. (See: " Health reform sticks: Now what?")

Those who purchase insurance through state health exchanges, which are online marketplaces where you can compare and shop for plans, may be eligible for federal subsidies, depending on their income and household size. Perhaps surprisingly, subsidies are available for those who earn up to 400 percent of the federal poverty level, though the size of the subsidy is greater for those who earn less.

Those who already have insurance through their employer can retain that coverage.

Aid for health insurance cost to come in form of tax credit

For a family of four, that means those earning between $23,000 and $92,000 in 2012 would be eligible for a subsidy, which would come in the form of a tax credit, says Cigna spokesman Joseph Mondy. About 19 million people who purchase health insurance through a state exchange are expected to be eligible for a subsidy.

"This is a wide-sweeping change for the middle class," Sutton says.

Each state must have an exchange in place by October and start enrolling clients at that time. Some states will set up their own exchanges; in other cases the federal government will run the state exchanges.

"If you have insurance you bought yourself as an individual policy, you're probably paying relatively high premiums," says Brian Haile, senior vice president for health policy at Jackson Hewitt Tax Service. If you qualify for the tax credits, "it's a tremendous savings for a lot of families."

Haile says as a result of the state exchanges, some employers might stop offering health insurance. If that happens to you, you'll be eligible to buy insurance on the state exchange. "It's almost like a fail-safe."

Review taxes for health insurance implications next year

The amount you receive in a subsidy can fluctuate. It's based on your modified adjusted gross income, which can change markedly each year for those in certain professions or if you're self-employed. Or other events, such as changing jobs can impact your income, Sutton says.

Your household size also is crucial, so if you marry, divorce, have a baby or something else happens that changes the size of your family, the subsidy will change, Haile says. "Even if your income is the same, your place on the poverty scale changes."

So if your household size increases or your income falls, the amount you pay out of pocket for insurance will decline. If your household shrinks or your income rises, you'll have to pay more, he says. That means you need to report any life changes so your subsidy will be adjusted.

A survey by the Tax Institute at H&R Block found 77 percent of consumers are unaware of the link between their 2012 tax return and their health insurance coverage starting in 2014.

H&R Block is tackling the issue by doing a free review of every client's tax return so each person will know about the amount of the tax credit they'd be eligible for, or the penalty they might pay, Sutton says.

"This is a way for them to understand the personal impact on themselves and their family," she says.

How penalties for not buying health insurance work

If you decline to purchase health insurance, you will have to pay a penalty. "The fee will be modest in 2014," Mondy says. "In the next two years, the fee quickly grows."

The penalties start at $95 for the first year or 1 percent of your income, depending on which is greater, and increase until they hit $695 or 2.5 percent of annual income. (See: " Health care reform evaders: How the uninsured will be caught.")

In one example cited by H&R Block, a family of four with a household income of $40,000 a year would pay about $170 a month out of pocket for health insurance. Meanwhile, the penalty for not purchasing insurance would jump from $285 in the first year to $975 in 2015.

"Health care is more and more going to be embedded in the tax code," Haile says.


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