In early 2015, taxpayers had to provide health insurance information on their income tax returns for the first time. As with any new tax filing provision, the process was more burdensome for some than others. The second year could bring its own series of nasty surprises.
The Affordable Care Act created a variety of tax consequences for Americans, but one that was little discussed until recently was the possibility of having to repay federal subsidies for health insurance. For many taxpayers, this obligation will come as a shock, as will the amount owed.
According to a report released by the US Department of Health and Human Services, in early 2015, nearly 6.5 million participants in the federal health insurance exchange qualified for advance premium tax credits. While these credits are not the only subsidies available through health care law, they are by far the most common. Eligibility is largely based on income, which means that those who receive the credits at the time of purchase, that is, who take advantage of the “advance” portion, had to submit estimates of their annual income.
However, estimates are rarely perfect. This became clear in fiscal year 2014, when taxpayers earning more than projected had to repay some or all of the credits to which they were no longer entitled.
The law included caps on reimbursement for those earning less than 400 percent of the federal poverty line. Those who earned more than 400 percent of the federal poverty line could owe up to all of the subsidies they received. According to a study by the Kaiser Family Foundation, the average amount owed by those who had to repay at least a portion of the credits in 2014 was $ 794. Any amount owed by a taxpayer can be deducted from their income tax refund. If the taxpayer is not owed a refund or the refund is insufficient, the person may have to write a check to the government.
For regular participants in the Health Insurance Marketplace, the need to reconcile advance credit payments and premium credit amounts based on actual income may no longer be a surprise. But many people who signed up for the Marketplace in 2015 didn’t sign up during the previous year, so many taxpayers still risk serious shocks this spring. For taxpayers who had more than one job, got married, divorced, had a child, or moved (especially between states), things can get even more complex.
How to avoid the impact of the Affordable Care Act stickers? Unfortunately for taxpayers, the credit reconciliation mechanism is a central part of the law and is unlikely to change in the near future. However, a few steps could at least minimize the pain of having to repay subsidies at tax time.
The government advises taxpayers who are unsure of their income to consider taking only a portion of the advance premium tax credits. While taxpayers can expect and receive some or all of their credits when filing their income tax returns, this solution assumes the willingness and ability to pay for insurance out of pocket. Given that a taxpayer’s income must fall below the appropriate threshold to qualify for the credits in the first place, this approach will not work for many, or even most, of those affected.
The government also recommends that taxpayers report any changes in income, household size, employment, address, or eligibility for other health care coverage during the year. Properly updated information will allow exchange managers to adjust subsidies throughout the year to minimize discrepancies at tax time. However, many taxpayers are unaware that they must update their information in a timely manner or are unsure how to do so. Such changes can be reported through the taxpayer’s online marketplace account or by phone, unless the change in question is an interstate move. In that case, the taxpayer will need to submit a new application, as the eligibility rules vary between states.
If a taxpayer suspects that there is a substantial gap between projected and actual income, they can also try to minimize modified adjusted gross income. This figure determines eligibility for a variety of federal tax benefits, including advance premium credits. Taxpayers can reduce it by increasing deductions known as “above-the-line deductions,” appropriately named for their position on Form 1040 above the adjusted gross income calculation. These deductions include educator expenses, deductible contributions from health savings accounts, moving expenses, deductible contributions to qualified employer retirement plans (including SEP and SIMPLE plans for self-employed workers), alimony payments, deductible IRA contributions, deductible student loan interest payments and deductible tuition and fees. Payments.
When it comes time to file taxes, taxpayers who received advance credits or plan to claim credits should take special care to provide all the necessary information to their tax preparers, or to enter all the information correctly in the case of autos. -preparators. These taxpayers must file federal income tax returns even if they are not required to do so to complete Form 8962. This form is used to claim or reconcile the credits. Note that taxpayers taking these credits are not eligible to file Form 1040-EZ due to the Form 8962 filing requirement.
Failure to file a return will prevent a taxpayer from receiving advance premium credits in future years. Meanwhile, failure to report credits taken can result in precision penalties, which are calculated as a fixed 20 percent of the net understatement of the tax. Similarly, failure to pay a tax liability attributable to the refund of the premium tax credit before April 15 may result in late payment penalties of 0.5 percent of unpaid taxes for each month, or part of a month, after the due date on which the tax is paid. unpaid, with certain exceptions. This penalty increases to a full 1 percent per month for any taxes left unpaid the day after the Internal Revenue Service issues a demand for immediate payment, or 10 days after it issues the notice of intent to garnish certain assets. .
Marketplace enrollees will receive Form 1095-A, which will list household members who had coverage through the federal exchange, the months those individuals were covered, and the relevant premium and subsidy amounts. All of this information will be needed to prepare Form 8962. Taxpayers who were insured elsewhere (privately or through their employers) can receive Forms 1095-B or 1095-C. The latter is issued by larger employers who are subject to the employer shared responsibility provision in law. For taxpayers who purchased health insurance coverage through the Marketplace and want to claim the premium tax credit, the information on these forms will help determine eligibility.
All taxpayers, regardless of Marketplace usage, will need to watch for a particular check box on their Forms 1040. That box indicates that everyone in the household had minimum essential coverage for the year. For those left without insurance, fines increased again this year, which could create another nasty surprise.
There are a variety of exemptions from the minimum essential coverage requirement, most of which have to do with some type of hardship recognized by law. Some exemptions can be requested directly on Form 8965, while others may require an application through the Marketplace. If a taxpayer’s application is still in process when they file a return, the IRS instructs them to put “pending” in the exemption code section. However, if the application is rejected, the taxpayer may need to file an amended return.
The Affordable Care Act covers both taxes and health care. For now, taking the time to understand how the law works is the best way to avoid a nasty surprise when it’s tax time.