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Individuals could face a hefty repayment to the IRS if they used the tax credits proposed in the House GOP health care bill and ended up earning more than they anticipated.
The Affordable Care Act capped the amount the Internal Revenue Service can recoup from individuals who receive a premium tax credit that is larger than the amount they are due to receive based on actual income. The limit starts at $300 for individuals earning less than $23,760, according to 2016 guidelines, and increases in line with income levels.
But the GOP plan doesn’t include those limits—which means the agency could require all individuals, regardless of income, to pay back excess tax credits in full if they earn more than they reported on their tax return in a previous year, health policy researchers and tax practitioners told Bloomberg BNA. Combined with the comparatively smaller credits individuals can receive under the GOP bill, that could be a significant hardship on middle- and low-income taxpayers, they said.
“There are no such protections here,” Edwin Park, vice president for health policy at the Center on Budget and Policy Priorities, said March 14.
The bill’s potential burden on taxpayers has come into focus in recent days, after the Congressional Budget Office found that insurance premiums would initially increase under the plan, which House leadership hopes to pass by the end of the month. Since the CBO released its report March 13, Republicans have also faced steady criticism because the report found 24 million people could lose their insurance in the next decade under the bill’s new system.
The legislation, the American Health Care Act, repeals the caps for the ACA’s premium tax credits for 2018 and 2019, and it provides no such caps for the new refundable tax credit created under the bill. The proposed tax credits have drawn the ire of Democratic lawmakers and even some moderate Republicans who say they are insufficient for low-income and elderly individuals.
A 27-year-old making $20,000 a year gets $3,225 a year in credits under the ACA on average, an amount that would fall to $2,000 under the GOP plan, according to the Kaiser Family Foundation. The plan’s credits increase with age but are capped at incomes of $75,000 for individuals and $150,000 for joint filers.
Those decreases would be compounded by the complexity of the transition period, said Seth J. Chandler, a visiting scholar at the Mercatus Center at George Mason University. Chandler specializes in insurance law.
Because the two-year transition period makes tax credits dependent on the ages and incomes of household members, it is “more complicated than either the ACA or where we end up,” he said.
Many low-income taxpayers hold multiple part-time jobs or work seasonal jobs, which makes it hard for them to accurately predict their annual income, practitioners said. Thus, the ACA caps helped ensure they wouldn’t need to repay large amounts to the IRS when they likely had spent the money over the course of the year.
“It’s certainly something that could be problematic for low-income taxpayers who aren’t going to have a few hundred dollars, or who knows how much, come tax time because they were accidentally getting $20 a month in advanced tax credits,” said Garrett A. Fenton, a member at Miller and Chevalier Chartered in Washington.
Not only could individuals owe more money under the Republican plan than they would under the ACA, but the IRS could also take more aggressive steps to get the money back. The agency could place liens or levies on taxpayers who owe the money—a step that is harsher than elements of the ACA such as the individual mandate, which imposes a penalty on taxpayers that fail to purchase insurance, said Timothy Jost, a professor emeritus at the Washington and Lee University School of Law.
It is more common for the agency to freeze tax refunds owed to individuals who must pay back the credit, but that still packs a punch. “For many people, your tax refund is the biggest amount you get all year long,” Jost said.
The argument for removing the cap is that the extra money isn’t something the taxpayers are entitled to, practitioners said. Lawmakers may also want to prevent fraud in which individuals try to game the system to claim more funds than they should, the practitioners said.
“Obamacare fails to treat taxpayers fairly—in some cases, it ignores inaccurate overpayments, an approach that does not exist for any other benefit in the tax code. The American Health Care Act simply helps ensure that individuals and families receive the right benefit amount and that people who receive overpayments (for which they’re not eligible) pay them back—just like all other benefits in the tax code,” Lauren Aronson, press secretary for the House Ways and Means Committee, said in a statement to Bloomberg BNA.
Still, Republicans may struggle to defend the change to other lawmakers who already say the credits in the bill are insufficient. The House Budget Committee is set to mark up the bill March 16, and House leaders aim to hold a floor vote the following week.
“You would think that would fit right into the narrative—that the bill is providing these tax cuts for the wealthy and, as part of that, you’ve got low-income people who are now not only going to have lesser subsidies but going to have this cap removed, and going to have to pay back amounts they would otherwise not have to pay back previously,” Fenton said.
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