Health Insurance Law Creates New Opportunities for Tax Preparation Franchisees

America’s tax code took a huge growth spurt with Obamacare, creating plenty of headaches for taxpayers, but new opportunities for the tax preparation business.

Update on Liberty Tax Service

We recently sat down with Martha O’Gorman, the Vice President of Marketing for Liberty Tax Service for an update on the tax preparation business. Last year we published a profile on Liberty Tax Service, “The Seven Billion Dollar Business that Never Goes Out of Style,” followed by stories about two of their most successful franchisees: Ty Lav and Mufeed Haddad — both immigrant entrepreneurs.

From Ms. O’Gorman, we learned that Liberty Tax was enjoying  excellent growth and, for the last seven years, had been outpacing their major competitors, HR Block and Jackson Hewitt in terms of the raw number of returns filed every year. So, O’Gorman had every reason to feel bullish about the growth of Liberty Tax’s business.

A Game Changer for Tax Preparers

Then O’Gorman  surprised us by revealing  a “game changer” for the tax preparation industry, a development that offers a significant opportunity for companies prepared to meet the challenge: the Affordable Care Act, or as it’s commonly known, Obama Care.

The basic facts of the program are well known. As of January 2014, all Americans were required by law to have a minimum amount of health insurance to cover themselves and their families. For the majority of people in America, this was not a significant hurdle as they were covered by insurance at work.  But an estimated 40 million people were required to purchase insurance either through an exchange set up in their state or through the federal government. For individuals without the means to do so on their own, the government created a program of subsidies to cover the shortfall. Despite a difficult rollout of the website, millions of people across the country now have health benefits for the first time.

 

“If have a $40,000 adjusted gross income, and you haven’t bought insurance, you’re looking at a $400 penalty, not $95.”  — Martha O’Gorman

However, according to O’Gorman, most people are not fully aware of are the extent of the penalties they will have to pay for non-compliance, and the impact it will have on their federal income taxes.  Needless to say, for  immigrant entrepreneurs, who already find our tax code difficult to understand, the impact of the Affordable Care Act will be especially challenging. In the last 100 years, the tax code has grown from 400 pages to over 73,000 pages!

A Rude Shock for Taxpayers

“The mistake most people were making is that they thought the penalty was just going to be $95,” said O’Gorman, stressing that this was on the “minimum penalty” that they would have to pay. The penalty is actually going to be 1% of their modified gross income, according to the Affordable Care Act.  O’Gorman offered the following example to illustrate: “If have a $40,000 adjusted gross income, and you haven’t bought insurance, you’re looking at a $400 penalty, not $95. And each year that you go without insurance, that penalty is going to multiply.”

Shock #2

A lot of people depend on their tax refunds each year to help pay for larger purchases including cars, appliances, and tuition bills, but if you among the millions of people getting a subsidy toward your health insurance premium, O’Gorman cautions you not to figure that money into your budget just yet, and offers the following illustration:

Let’s say you qualified for a plan that was $400 and some dollars, and they calculated that your subsidy was going to be $200 a month. If your financial circumstances change and you start to make more money, or the subsidy was overpaid, you will be required to pay back the difference — and the way that you do it is through your tax refund.”

At first glance this seems reasonable enough, but the problem is that the Internal Revenue Service — which is understaffed already —will be handling the calculations. “A lot of people are going to have their refunds held up as result,” said O’Gorman.

“For immigrant entrepreneurs, who already find our tax code difficult to understand, the impact of the Affordable Care Act will be be especially challenging.”

Three Ways Liberty Will Assist the Taxpayer

Starting in November, Liberty Tax Services will be conducting a promotion to get taxpayers into their offices early, in order to help them through the transition. In some cases, Liberty will help taxpayers establish their exemption from the Affordable Care Act, but  it won’t help everyone with their 2014 return. However, at the very least,  coming in early will help taxpayers with their subsidies and penalties going forward.

1. We going to make it easier for people to get their health insurance and understand the ramifications, and hopefully that will translate into more customers for the next season.
2. We will advise people if we think they qualify for the more than 14 exemptions to the ACA which will also help reduce the burden of the act on those who cannot afford to participate.
3. So we see it as a huge opportunity, not only to help people navigate this policy, but also to help them save money going forward by making sure they get the right insurance.