By Brian Tumulty
Gannett Washington Bureau
WASHINGTON - The federal government's strategy for making health coverage "affordable'' next year for middle-income Americans largely depends on a new federal tax credit.
Health care experts prefer to describe it as a subsidy or discount on health insurance premiums.
"It's more like a subsidy that you are entitled to," said Kathleen Stoll, director of health policy at the health care advocacy group Families USA. "You get it when you purchase health insurance and you don't have to wait until you file taxes the following year. And it's refundable, which means you get it even if you owe no taxes.''
The credit will be available as soon as a family enrolls in a health plan through one of the state-based exchanges created under the 2010 Affordable Care Act.
Many tax credits - such as the $1,000 child tax credit many families claim for children under 17 - are applied when people file their annual income tax returns. The credits either reduce a tax bill or increase a refund.
But the health care tax credit, which takes effect in January, is more like the immediate discount supermarket shoppers get at the cash register for items that are on sale.
The software used by the health exchange will immediately ring up the discounted health premium based on a family's estimated income.
"It's real money whether you have a tax obligation or not,'' said Sean Nicholson, a Cornell University professor of Policy Analysis and Management.
That's expected to help persuade people to enroll.
"I think particularly for low-income people it will make all of the difference in the world,'' said Lisa Dubay, a senior fellow at the Urban Institute. "Some families will just be happy they can get coverage." She said that, until now, insurers in many states have denied coverage or charged higher rates if a family member is obese or has asthma, arthritis, hypertension or high cholesterol.
Those who don't get health coverage in 2014 will pay a tax penalty under the 2010 health care law.
That penalty, part of the law's "individual mandate" that requires everyone to have insurance, was upheld by the Supreme Court. A majority of the justices determined it's a tax that Congress has the authority to enact.
Uninsured Americans will begin paying the penalty - a minimum $95 for low-income people - when they pay their taxes in 2015. That's also when people who receive federal tax credits to help pay their health premiums will begin reporting them to the Internal Revenue Service.
Mark Mazur, assistant treasury secretary for tax policy, said families enrolling in health insurance through the state exchanges will receive a form in the mail in early 2015 to report the total amount of tax credits they received the previous year.
"The Treasury and IRS understand that there will be many low- or moderate-income people wanting to claim it,'' Mazur said. "We'll make sure the form is available so they can do that.''
Although the new credit will make filing a tax return somewhat more complicated, Mazur said, "Most taxpayers use some form of electronic tax filing software. This will be another series of questions that are built into that.''
Families who underestimate their income when signing up for health coverage and get a bigger tax credit than they're entitled to will have to repay most or all of the extra money on their returns. Likewise, people who overestimate their income may qualify for a refund.
People whose income significantly changes during 2014 are being urged to inform the health exchange in order to make sure they receive the proper amount of tax credits.
The Affordable Care Act was enacted in 2010 with the overall purpose of reducing the number of Americans without health coverage.
One way that will be accomplished is through an expansion of Medicaid coverage for the poor.
People who go to a health exchange to purchase insurance will be automatically enrolled in Medicaid if their income is low enough to qualify.
The exchanges also will be available to small businesses as a way to purchase coverage for employees. Small businesses with up to 25 employees and average employee wages no more than $50,000 already can receive a federal tax credit that reimburses them for 35 percent of the employer cost of health premiums. According to the Treasury Department, roughly "a couple of hundred thousand'' small employers already claim this tax credit.
In January, the small-business health care tax credit will increase to half of the employer's cost of providing insurance.
The Obama administration has proposed expanding that tax credit to small businesses with up to 50 employees, but Congress has not acted.
The new tax credit for individuals and families applies to people who don't have employer-provided coverage. Households with incomes up to 400 percent of the poverty threshold are eligible, which covers single people with incomes up to $45,960 or a family of four with an income up to $94,200.
The family tax credit for health insurance is available on a sliding income scale, with households near to the income cutoff getting less generous financial assistance than poor families.
Coverage through the exchanges is available at bronze, silver, gold and platinum levels.
A New York couple who are both 40 with two children and an annual income of $90,000 would receive an annual tax credit of up to $1,150 to help pay for silver-level health insurance, according to a subsidy calculator developed by the nonpartisan Kaiser Family Foundation.
If that same family of four earned only $50,000, the tax credit would grow to $6,334. The family earning $90,000 would pay a $713 monthly premium while the family earning $50,000 would pay only $280 a month.
For some households, the tax credit will top $10,000 a year.
A New York couple who are both 63 with no dependent children and an annual income of $50,000 would be eligible for a tax credit of $10,218 to cover most of the $14,968 annual cost of a silver-level health plan, according to the Kaiser subsidy calculator. That couple's monthly premium would cost them $396.
A silver-level health plan represents the second-tier of coverage. Bronze plans have high deductibles and co-pays. Gold and platinum plans have the most expensive premiums but the smallest deductibles and co-pays.
Contact Brian Tumulty at firstname.lastname@example.org Twitter: @NYinDC