Tax Realities for Self-Employed Who Get Obamacare Subsidies

Photograph by Getty Images

Since I wrote a recent explainer about government subsidies for self-employed individuals who purchase health coverage through the Obamacare insurance marketplaces, many readers have followed up with tax-related questions. (In a nutshell, the Affordable Care Act subsidies I described are available to individuals making up to about $45,000 annually and four-person households bringing in about $94,000.) Here are a few answers on how self-employed individuals’ taxes will be affected.

Question: If a self-employed individual gets a subsidy for an insurance purchase on the exchange, is that subsidy treated as income for tax purposes? Will I get a 1099 for that amount?

Answer: Obamacare subsidies will not be treated as income and will not be taxable. The subsidies are designed to reduce out-of-pocket costs for individuals who don’t have employer-based insurance. They can be taken either up front, as premium assistance credits to reduce your monthly insurance premiums, or after the fact, as tax credits on your 1040 return.

“Statements will be issued reporting the amount of any advance credit payments received during the year,” says Twila D. Midwood, a tax preparer at Advanced Tax Centre in Rockledge, Fla. Since a subsidy won’t be considered income, it probably will not be reported on a 1099 form, she adds.

The statements will be used at tax time to reconcile whether the credit you took based on your estimated income was in the correct amount, given the actual income you report for the year. If the subsidy was too high, you may have to pay some part of it back. “Likewise, if the taxpayer received less than the allowed amount, they may be entitled to a refund,” Midwood says.

Ben Tallman, owner of Tallman’s Tax Service in Atlanta, points out one insurance-related scenario under which you might get a 1099. That wouldn’t be for an Obamacare subsidy, but for a rebate check from your insurer. “If the insurance provider does not spend 80 percent of premiums on health-care expenses, that provider will be required to rebate the excess premiums back to the individuals,” Tallman wrote in an e-mail. “These rebate checks will generally be taxable and come with a 1099.”

Question: Who do I contact as I’m applying to buy insurance through an Obamacare marketplace to make sure I estimate my self-employment income correctly? If I get a subsidy, I don’t want to end up owing thousands of dollars to pay it back.

Answer: Go to the website of your state insurance marketplace or the federal marketplace to get information on how to estimate your 2014 income and to report higher or lower-than-anticipated income as it comes in next year. “All indications show that the taxpayers will be responsible for monitoring their income during the year to ensure that they are receiving the correct amount of subsidy,” Midwood says.

Michael D’Addio, a principal and co-chairman of the health-care reform task force at Marcum, an accounting and advisory company, predicts that the uncertainty around many self-employed individuals’ income will make the subsidies messy. “When people get the subsidy as a premium credit based on their 2012 income and then file their taxes for 2014 and find out they’re ineligible and have to pay it back, there’s going to be a lot of screaming,” he says.

Tallman recommends that self-employed people reevaluate their revenues and expenses monthly, or at least quarterly, and contact their exchanges to be recertified for subsidies if they have large income increases. “That periodic adjustment should keep them from paying back large sums at the end of the year,” he wrote.

But even diligent individuals who notify their marketplaces that they’ve landed a new client, say, and are making more money than expected, face another problem, as D’Addio sees it: “Say you’ve set aside money to pay for your premiums, then you bring in more income. Your out-of-pocket expense will increase. That makes it difficult to know up front how much to save for your insurance costs.”

On the other hand, he notes, the new law will benefit many individuals with preexisting medical conditions by opening up competitive marketplaces to them.

Question: Under Obamacare, can a self-employed individual deduct health insurance premiums as an expense on line 29 of the 1040 tax return as in the past?

Answer: The ACA made sweeping changes to the health-care market, but it did not substantially change the individual health insurance deduction. As always, the line 29 deduction is available to those whose business income shows a profit, D’Addio says, and who are not eligible for employer-provided insurance, either from a side job or a spouse’s job.

If you list unreimbursed medical expenses, including insurance premiums, as itemized deductions on your Schedule A, you can continue to do that, Midwood says. You would list the actual out-of-pocket cost to you, not including any subsidy you receive.

Obamacare does raise the threshold for that deduction starting in this year, however, unless you are 65 or older. “You can only deduct medical expenses to the extent that they exceed 10 percent of adjusted gross income,” D’Addio says. “It used to be if they exceeded 7.5 percent.” The 10 percent threshold will apply to everyone, regardless of age, after 2017.

    Before it's here, it's on the Bloomberg Terminal.