Taxable Talk

The IRS is part of the Executive Branch of government. The Executive Branch can’t write law–they can issue regulations based on laws passed by the legislative branch (Congress) and then only when Congress authorizes it. There’s an issue percolating in the courts which is likely going to cause a huge headache throughout the country: tax credits for federal health care exchanges.

Today, a federal court judge in Washington denied the Administration’s request to stop a lawsuit challenging the IRS’s interpretation of the ability to give tax credit subsidies on federal health care exchanges. US District Judge Paul Friedman denied a preliminary injunction but did order the case tried on an expedited basis; he said that he expects to issue a ruling by February. Earlier this year a judge in Oklahoma also denied an Administration dismissal request in a similar case. There are two other cases filed on this matter.

Jonathan Adler of the Volokh Conspiracy notes the issue succinctly:

The IRS rule contravenes the plain text of the PPACA, as the statute only authorizes tax credits (and subsidies) for the purchase of insurance in an exchange “established by a state” under Section 1311 of the law…Supporters of the IRS rule claim that Congress could not have intended that Americans in dozens of states would be unable to obtain tax credits to help them purchase insurance. They’re right. Congress intended for every state to create its own exchange, as PPACA supporters said time and again, but states refused. Now that their assumption has been proven wrong, this does not provide an excuse to rewrite the plain statutory text.

This matters because in tax when a statute says “x,” it’s “x.” A good example of this is some of the ludicrous ways the Alternative Minimum Tax impacts individuals. Judges have stated in their rulings that these make no sense but because it’s written into the statute, there’s no choice on this matter: Until Congress changes the law, they’re stuck. I expect the same thing to happen here. Of course, Congress could change the law but the chance of that happening is equivalent to the chance of snow in Las Vegas in July.

Assuming that this suit is successful, it will strike at the heart of the mandates in the law. Assuming this ruling comes in February, there will be even more of a mess with the law. The ObamaCare rollout has hardly been something one could call “smooth.” Proponents have been hopeful that the light they’re seeing is the end of the tunnel. To me, it looks like an oncoming train.

44 days isn’t much time. It’s about a month and a half. Yet in the bizarre world of the Affordable Care Act (aka ObamaCare), it’s a big deal. Over the coming weeks I’m going to be looking at various provisions in light of the current law and the current difficulties–perhaps impossiblities–of individuals to actually sign up and obtain a policy. Consumer Reports is suggesting that perhaps a solution to signing up is to wait a while–at least a month; hopefully by then the software glitches will be gone.

Anyway, back to the point of this post, 44 days. Nancy Pelosi famously said, “But we have to pass the bill [ObamaCare] so that you can find out what is in it.” Well, there are some interesting deadlines in ObamaCare:

December 15th: Date you need to be enrolled by for coverage to take effect on January 1, 2014 [1];
February 15, 2014: Date you must have coverage by in order to be exempt from the Individual Mandate Tax; and
March 31, 2014: Final date to enroll for calendar year 2014.

The Obama Administration was unaware that someone who enrolls on February 16, 2014 will be subject to the individual mandate penalty tax until it was pointed out to them. The penalty for 2014 is $95 or 1% of Adjusted Gross Income, whichever is greater. I suspect for much of my client base the 1% of AGI will be greater, perhaps far greater than $95. Consider an amateur gambler who has $100,000 of gambling wins and $100,000 of gambling losses and who makes $100,000 of salary. He’s looking at a $2,000 penalty. Still, given the cost of health insurance under ObamaCare that might be a more financially prudent choice.

But do be aware that the true deadline is February 15th, not March 31st. It’s yet another quirk in the law.

[1] It is unclear if dates that fall on weekends–December 15th falls on a Sunday–cause the deadline to be extended a day. As best as I can tell, the answer to that is no…but I did not read the 3,000 page legislation.