If this year's real-estate market is a good one for Larry Lyons, the federal subsidy that helped him buy health insurance may turn into a huge bill at income tax time.
Four months after the Goodlettsville real-estate agent chose a health insurance plan on healthcare.gov, he's perplexed by a letter from the U.S. Department of Health and Human Services asking him to prove his income and his children's citizenship.
"I have been filing tax returns for years with the IRS," Lyons said. "Now, I am going to have to send citizenship documentation."
And he's baffled by the demand for upfront proof of his 2014 income, which can vary widely depending on how many houses he sells and the prices of those homes.
If the estimate he gave when he applied for coverage turns out to be low, Lyons could be in for an unpleasant surprise in April - and so could many others, according to George Brandes, vice president of health care programs at Jackson Hewitt Tax Service.
The Affordable Care Act's subsidies for buying health coverage on the federal exchange are actually tax credits given in advance, with the final accounting due by April 15 when people file their returns. Many taxpayers will end up having to repay part or potentially all of their subsidies. Conversely, others may qualify for bigger refunds. It all depends on how well they estimated their 2014 incomes.
"As many as 1 in 5 of the people in the top half of the tax credit range might actually end up having income that puts them out of the tax credit range, which means whopping bills at tax time," Brandes said. "We're talking about millions of people here."
Everyone who applied for a tax credit on the federal health insurance exchange had to estimate 2014 income - an unusual scenario because most tax credits, such as those for college tuition or the adoption of a child, are typically given retroactively.
Brandes pointed to an analysis by labor and health policy experts published in Health Affairs. The authors concluded that people with incomes just over 400 percent of poverty are at greatest risk for unexpected tax problems. Using 2012 numbers, they gave the example of a family of four with a household income above $92,200 having to repay as much as $11,200.
That's a worst-case scenario. Most taxpayers will be given some level of protection through repayment caps.
Brandes said his comments are based on the Health Affairs study, which analyzed income data from California.
"They came up with some pretty shocking conclusions," he said. "They estimated that about 3 out of 4 subsidy recipients will be families with income changes greater than 10 percent" from the families' original projections. "Some people will have underestimated, and some people will have overestimated."
Lyons said it's hard to be accurate when estimating income based on unknown sales.
"If I have a great end of the year and I make more than I expected to, what kind of fines or charges or repayment am I going to have to make on the amount that I estimated?" he asked.
People can protect themselves from unpleasant surprises by reconciling their estimated income sooner rather than later, Brandes said. Waiting until later could also delay refunds.
People are supposed to report changes in income by logging into their healthcare.gov accounts or calling the health insurance marketplace at 1-800-318-2596.
"We estimate the reconciliation process could affect as many as 10 million or more taxpayers - those enrolled at the end of the open enrollment period plus enrollments from special enrollment events," Brandes said.
One way to lessen the risk of being hit with a repayment is to reduce gross income by putting more money into a pretax retirement account, he said.