The following is part 1 of a 3 part series from Matthew McMillan, a subject matter expert on tax law . Check back next weekend for the second post on this important topic
It Was A Dark & Stormy Subsidy
This week the US Court of Appeals for the District of Columbia made headlines by striking down a health care tax credit enacted under the Affordable Care Act in the case Halbig v. Sebelius. What are these tax credits and how will they affect Floridians? Over the past few years, I have had concerns about the implementation of these tax credits. The court decision complicates matters further. The challenge presented by these tax credits is that they require the insurance customer to predict the future. That future is cloudy.
The largest and most ominous cloud on the horizon is the United States Supreme Court. In the Affordable Care Act, Congress grants the tax credit to those who purchase insurance on State Exchanges. The law does not specifically mention a tax credit for the Federal Exchange. Nevertheless, the IRS went ahead and issued a rule granting the credit to both State Exchanges and the Federal Exchange. Florida does not have a State Exchange of its own. Most states do not. Only sixteen states and the District of Columbia opted to create State Exchanges. If the DC Circuit ruling is correct, the tax credits are unlawful and will not be available in Florida (or in the vast majority of the country) where Floridians have already purchased policies on the Federal Exchange with the expectation of the subsidy.
Because the DC Circuit and the 4th Circuit have conflicting answers for the validity of the tax credit, we will all wait to see how the United States Supreme Court resolves the question. Most likely there will be no answer until next year. Sharp policy disagreements prevent Congress and the President from changing the law sooner. What does that mean for 2014 in the meantime? We will have to wait to see how the IRS responds to these decisions.
To illustrate how much is at stake I quote an example cited by the DC District Court: “a single parent with two children in Florida, earning $41,000, would likely be charged about $5700 per year for a “silver-level” insurance plan on the federally-facilitated Exchange operating in that state. If the tax credit is available, the family would pay approximately $2700 for this insurance, after receiving a tax credit of about $3000. If the tax credit is unavailable, the family would bear the full cost of health insurance.” $3000 is a lot of money!
Regardless of how one views the Affordable Care Act, well beyond the tempest of a judicial and political nature, there are clouds of a more personal nature that can interfere with the health care tax credit. The tax credits are a subsidy based upon income. Health insurance premiums are sold based on an assumption of future income level in the upcoming year. What happens if an unanticipated income item bumps the family to a higher income level and the credit is reduced or eliminated? In my next installment, we will see how certain life events unexpectedly threaten the amount of the health care tax credit subsidy. No matter what the Supreme Court rules, our Florida family may not receive the entire $3000 credit promised to them when they made their purchase on the exchange.
Matthew McMillan, JD, LLM is founding partner of Tax Armory, LLC where he represents clients with IRS contriversies. He currently serves as President of the Seminole County Young Professional Republicans.