You should never make decisions about taxes based on what an insurance agent says. When it comes to taxes, we only know enough to be dangerous.
As a group, we are normally trained on the advantages and loop-holes that our products offer. However, we are often not aware of the tax traps that are inherent in the policies that we sell.
A couple of months ago I wrote, “Should Insurance Agents Talk Taxes?” In that post I outlined a couple of areas in which we insurance agents tend to offer one-sided tax advice. Earlier this week I read an article that discussed a new tax trap in which Americans can get trapped this fall if they elect to get a subsidized Essential Health Benefit through the new Health Benefit Exchanges.
The implication behind the word, “Subsidy” is that someone else, the federal government, is going to pay part, or all, of a liability (health insurance premium) for you. It is normal for you to infer that if you accept the subsidy you will have no future problems.
That is not always going to be the case. The subsidies that will be given by the federal government will not be gifts. They will be tax credits. Those credits will be based on the amount of income that you report to the Internal Revenue Service for 2012.
You may be caught in a tax trap if your income in 2014 is greater than your income in 2012. If the tax credits are paid on your behalf based on your 2012 earnings and you experience a job change, raise, etc. for 2014 that causes your income to increase, you will be required to pay the difference back to the IRS in 2015.
My intention in raising this point is not to discourage someone who is currently uninsured from getting health insurance. My intention is only to help middle-class Americans make informed decisions.
When the Open Enrollment begins in October, the Health Benefit Exchanges will have many Essential Benefit Plans available from which you may choose. Only one of the options will be available for federal tax subsidies.
Before your eyes get wide and you start chasing the “Free Money” ask your professional tax expert what the tax implications are if things change for you. Your insurance professional can help you understand the different Essential Benefit Plans. However, you should consult with a tax professional before you make a final decision if you are considering claiming Obamacare’s subsidy.
The good news is that many middle-class Americans will not be faced with this dilemma. The only ones who will be required to make this decision are those who do not have a group health insurance plan available at work, are on Medicare or are otherwise exempt from Obamacare.