New health-care credits rely on income accuracy

The government will determine your subsidy based on

The government will determine your subsidy based on your 2012 tax return. Photo Credit: iStock

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Millions of people who take advantage of government subsidies to help buy health insurance next year could get stung by surprise tax bills if they don't accurately project their income.

President Barack Obama's new health care law will offer subsidies to help people buy private health insurance on state-based exchanges, if they don't already get coverage through their employers. The subsidies are based on income. The lower your income, the bigger the subsidy.

But the government doesn't know how much money you're going to make next year. And when you apply for the subsidy, this fall, it won't even know how much you're making this year. So, unless you tell the government otherwise, it will rely on the best information it has: your 2012 tax return, filed by this month.

What happens if you or your spouse gets a raise and your family income goes up in 2014? You could end up with a bigger subsidy than you are entitled to. If that happens, the law says you have to pay back at least part of the money when you file your tax return in 2015.

That could result in smaller tax refunds or surprise tax bills for millions of middle-income families.

Health care providers, advocates and tax experts say that most Americans know very little about provisions of the Patient Protection and Affordable Care Act, let alone the kind of detailed information many will need to navigate its system of subsidies and penalties.

A draft of the application for insurance asks people to project their 2014 income if their current income is not steady or if they expect it to change. The application runs 15 pages for a three-person family.

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Most  taxpayers won't actually receive the subsidies. Instead, the money will be paid directly to insurance companies and consumers will get the benefit in reduced premiums.

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