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 proved more onerous for some than others. The second year could bring its own set of unpleasant 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 pay federal health insurance subsidies. For many taxpayers, this obligation will be 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 marketplace qualified for advance premium tax credits. While these credits are not the only subsidies available through the health care law, they are by far the most common. Eligibility is largely based on income, which means that those who take the credits at the time of purchase, that is, taking advantage of the “advance” part, had to submit estimates of their annual income.
Estimates, however, are rarely perfect. This became clear in tax year 2014, when taxpayers who earned more than they projected were required to pay back some or all of the credits they were no longer entitled to.
The law included payment caps 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 pay at least part of the credits in 2014 was $794. Any amount a taxpayer owes can be deducted from their income tax refund. If the taxpayer is not due 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 Marketplace in 2015 didn’t sign up the year before, so many contributors are still at risk of nasty surprises this spring. For taxpayers who have held more than one job, married, divorced, had a child, or moved (especially between states), things can be even more complex.
How to avoid the impact of the Affordable Care Act label? 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 pay subsidies at tax time.
The government advises taxpayers who are unsure of their income to consider taking only a portion of their premium tax credits up front. While taxpayers are allowed to 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 won’t work for many, if not most, affected individuals.
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 administrators to adjust subsidies throughout the year to minimize discrepancies at tax time. However, many taxpayers are unaware that they need to 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 file a new application, as eligibility rules vary from state to state.
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 advanced premium credits. Taxpayers can reduce it by increasing deductions known as “above the line deductions,” aptly named for their position on Form 1040 above the adjusted gross income calculation. These deductions include educator expenses, deductible health savings account contributions, moving expenses, deductible contributions to qualified employer retirement plans (including SEP and SIMPLE plans for the self-employed), alimony payments, IRA deductibles, deductible student loan interest payments, and deductible tuition and fees. Payments
When it comes time to file taxes, taxpayers who received credits in advance or plan to claim credits should take special care to provide all necessary information to their tax preparers, or enter all information correctly for self-preparers. 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 credits. Please note that taxpayers taking these credits are not eligible to file Form 1040-EZ due to the Form 8962 filing requirement.
If a return is not filed, the taxpayer will not be able to receive advance premium credits in future years. Meanwhile, failing to report credits taken can result in accuracy penalties, which are calculated as a flat 20 percent of the net tax understatement. Similarly, failure to pay a tax liability attributable to the premium tax credit refund by 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 tax that is not paid the day after the Internal Revenue Service issues a demand for immediate payment, or 10 days after it issues a notice of intent to seize certain assets. .
Health Insurance Marketplace enrollees will receive Form 1095-A, which will include a list of household members who were covered 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) may receive Forms 1095-B or 1095-C. The latter is issued by larger employers who are subject to the employer shared responsibility provision in the 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 their use of the Marketplace, will need to be on the lookout for a particular checkbox on their Form 1040s. That box indicates that everyone in the household had minimum essential coverage for the year. For those who remained uninsured, the penalties increased again this year, which could create another unpleasant surprise.
There are a variety of exemptions to the minimum essential coverage requirement, most related to 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 he or she files a return, the IRS directs the taxpayer to put “pending” in the exemption code section. However, if the request is denied, the taxpayer may need to file an amended return.
The Affordable Care Act is as much about taxes as it is about health care. For now, taking the time to understand how the law works is the best way to avoid an unpleasant surprise come tax time.
