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What to Do: Take Coverage Credit Now, Later or Bit of Both

By John Reichard, CQ HealthBeat Editor

June 10, 2013 -- Among the decisions millions of uninsured Americans will have to make this fall is how to claim the tax credit that offsets some or most of their cost of buying health insurance.

It's not a simple matter to decide. And getting it wrong could mean a whopping tax bill down the road or an unexpected windfall.

Consumer activists who support the health care law are intent on making the decision less of a gamble. And they certainly want to avoid the nasty surprise for consumers of a tax bill that's hundreds of dollars larger than expected.

It's the kind of thing that could further undercut support for a law that polls show is not exactly well liked by the American people.

Consumers Union has developed a brochure that it is confident will make the choice manageable. And officials there say the pamphlet has tested well among focus groups that have included a wide cross section of consumers, including in states hostile to the health law (PL 111-148, PL 111-152).

A close look at the brochure and the thinking behind it reveals some of the calculations consumers will have to make, and why the credit could be problematic.

For example, to keep from taking too big a credit, consumers will have to tell the local exchange things they might not be too keen on sharing, such as changes in income or a reduction in household size stemming from a divorce.

Lynn Quincy, senior health policy with Consumers Union, noted in a recent presentation to Maryland outreach groups that even getting people to pay attention to a brochure in the first place is a challenge.

She says that if people think a leaflet is from an insurance company they won't bother reading it. And one of the problems with the tax credit is that middle income people think it's for poor people, not for them.

Consumers Union, which got a grant from the Robert Wood Johnson Foundation to help with the project, found a way to deal with both problems on the first page of the brochure. It says at the top: "Health Insurance Marketplace—"

That establishes the information as coming from the government. As much as people are apt to be suspicious of the government, particularly in states opposed to the health law, consumer testing shows they trust it as an objective source of information on things like insurance, says Quincy.

That was true not only in Massachusetts, she said, but in two other states where CU did focus group testing—Oklahoma and Utah.

Qualification Blueprint

The other heading on the first page was one that testing showed had broad appeal no matter how one felt about the health law, while also making it clear that the middle class can get the tax credit. The heading that worked best, together with pictures of smiling people: "Cut the cost of health insurance: A new tax credit helps lower and middle income families."

The next page of the four-step document is designed to quickly establish whether the reader is qualified to receive the tax credit. If they answer "No" to three questions they may be able to take it: 1) Does your employer offer health insurance? 2) Do you receive Medicare? and 3) Does your family make more than the yearly income below?

The dollar amounts listed clearly show that the credit isn't just for the poor. It says, for example, that a family of four with a yearly income of $94,200 could qualify. A family of six with an income of $126,360 could also be eligible. And an individual could be earn as much as $45,960 a year and get the credit.

Step two answers the question: "What is this tax credit?" It explains that the "Health Premium Tax Credit reduces the total amount of income tax you owe the IRS. You get the tax credit to help cut the cost of your health insurance." It then asks "Can I use my tax credit for any health plan?" "NO" is the emphatic answer. "You MUST buy your health insurance from" and then it gives the name of the insurance exchange together with the phone number and website.

Weighing the Options

Step Three explains that there are two ways to take the credit and then advises: "You decide!"

Under the "Take It Now!" option, the brochure for federal exchanges explains that consumers must sign up between October, 2013 and March, 2014 by going to Consumers should say they want the credit "in advance." At that point the consumer can choose to take all of the credit in advance or part of it, leaving some wiggle room in case their income or family situation changes and it turns out they aren't entitled to as much of a credit.

The brochure explains that taking the credit in advance will mean that in 2014, the consumer will "pay a lower premium each month. It then says that between January, 2015 and April, 2015, the Health Insurance Marketplace will send a statement showing how much tax credit the consumer received in 2014 so they can enter that on their 2014 tax return.

The advantage: "Lower your health care premium each month!"

Option two is "Take it Later!" Again, the brochure explains when and where to sign up for coverage. However, this time it explains that "you pay the full premium each month in 2014—and now you are covered." Then when the consumer files his or her 2014 taxes, they'll be able to subtract the premium credit from the income taxes they owe "or get a bigger refund if you don't owe anything."

The advantage: "Lower the amount you pay at tax time!"

To personalize the decision, the brochure shows a smiling picture of "Jane" mulling her options. Readers quickly tune in to such personal stories to grasp what the brochure is saying, Quincy says.

Jane says: "If I take the credit now, I lower my monthly premium cost to $60." But "if I take the same tax credit later, I pay the full $300 premium now but get a bigger refund next April" totaling $1,980 rather than having to pay the IRS $900.

Avoiding Repayments

The final step asks "Taking the Credit Now? Get the Right Tax Credit."

"If you take the tax credit in advance, changes to your family size or income—or even a new job that offers health insurance—could mean you're getting the wrong amount of tax credit," the brochure says. "To make sure you get the right amount, call when you have changes" in family size or income, it says.

"Remember, it's your responsibility to tell your state's Marketplace!" readers are counseled and are reminded of the phone number to call. If family size goes down through divorce or because a child can no longer be claimed on a return, the brochure advises the consumer to call to recalculate the credit amount "so you won't owe money." And if the family sizes increases or one's income goes down, "call so you might get more credit." The pamphlet then tells the story of "Claudia and Patrick" who took the credit in advance, got an increase in income and forgot to tell the exchange. They had to pay the government back $2,000.

"Remember, it's your responsibility to tell your state's Marketplace!" readers are reminded. "You control how much tax credit you use in advance." To lessen the odds of an unpleasant surprise, "talk to your Marketplace about taking a partial credit," it says. "Your monthly premiums will still be lower but not as much. By taking the rest at tax time, there is less chance of repayment."

Quincy says that focus group testing shows that even those with negative opinions about the health law thought it was fair that they should have to tell the exchange about changes in their family size and income. And those with a negative view of the overhaul also said they would take the credit because they thought it would help their families.

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