The Affordable Care Act and Taxes
This is certainly a very important issue due to the far reaching regulations and complexity of the ACA. The time necessary to complete tax returns will increase from prior years, especially for those who received their health insurance through a Health Insurance Exchange; or for taxpayers and dependents who did not have coverage during the year (see “Penalty” section). Those who have every tax return dependent covered with at least “minimum essential coverage” (defined later) will not have additional tax forms to file. You will, however, need to verify with us in writing before we start your tax return that each person claimed as a dependent on the return has coverage. CPA and tax firms industry-wide are gearing up for these new reporting requirements.
This may feel overwhelming so we have included information below that may help ease your understanding of the ACA tax implications.
General rules of the 2010 Health Care Bill:
Starting on January 1, 2014, most Americans were required to obtain “minimum essential health care coverage”. Those who did not cover themselves or their dependents claimed on their tax returns this year will most likely incur a penalty, also known as the “shared responsibility payment”. That penalty is explained below. There are a few exceptions to the coverage rules that are also noted below. Those who received insurance through the Health Care Exchanges may have obtained a “premium reduction credit” based on their income level, which was basically a prepaid income tax credit. That prepaid credit will be reconciled with your actual credit when your 2014 tax return is prepared. You are not able to purchase insurance through the exchanges except for the open enrollment periods, the second of which started November 15, 2014, and going through February 15, 2015, or for 60 days after a “Qualifying Life Event” (marriage, child birth, etc.). http://www.irs.gov/pub/irs-pdf/p5152.pdf
Minimum Essential Coverage: As explained by the IRS Medicare; Medicaid; TRICARE; CHIP; Veteran’s Health; Employer Sponsored Plans; or at least a Bronze level plan (as defined in the Exchange plan options.
Insurance Exchange: A state or federally run insurance store that acts as a middleman for insurers and consumers. The Exchange establishes certain requirements and guidelines for four different policy types of insurance (Bronze, Silver, Gold or Platinum… or similar designations), and insurers then submit policies to the exchange for approval and classification.
Exemptions to Having Coverage: http://www.irs.gov/pub/irs-pdf/p5172.pdf
Religious conscience (opposed to accepting insurance benefits); not required to file a tax return; short coverage gap of less than three months; unaffordable coverage options (based on income level and premium costs); and “hardships” (things like homelessness, bankruptcy, eviction, foreclosure, death of a close family member, human or natural disasters, and a few others).
Penalty or “Shared Responsibility Payment”: http://www.irs.gov/pub/irs-pdf/p5156.pdf
The penalty for not having coverage is calculated on a month-by-month basis. It is calculated and paid via the income tax return process. Some may have heard that the penalty is “only $95” for the year. This may be true… but it may be MUCH worse:
2014: $95 per adult, $47 per child, or 1.0% of family income, whichever is greater.
2015: $325 per adult, $162 per child, or 2% of family income, whichever is greater.
2016: $695 per adult, $348 per child, or 2.5% of family income, whichever is greater.
NEW TAX FORMS
Form 1095-A: If you get insurance through any federal or state health insurance exchange, you should receive this form from the exchange by January 31, 2015. We will require this tax form before we prepare a tax return, and before any related tax credits can be obtained. We will be asking every client if they received one, and our Organizer Questionnaire will do the same.
Form 1095-B: This form will be from an insurance company and will report proof of minimum essential coverage so covered taxpayers can avoid a penalty. However, this form is optional for the 2014 tax year; so many taxpayers won’t see one. This means we will need to rely on written information from taxpayers… requiring a signed statement of coverage so we cover our responsibility to report properly. This form should be much more common by the 2015 filing season.
Form 1095-C: This form will be from employers to show employees’ proof of coverage. Again, this form is optional for 2014, except employers with over 250 employees, which MUST file it this year. Hence we need to receive this form if our clients receive it. Otherwise, we will require written statements by the taxpayer to report coverage properly.
Form 8962—Premium Tax Credit:
This tax form only applies to those who obtained health insurance through an Exchange. It calculates any premium tax credit based on your actual reported 2014 income, and compares it to anticipated income when the exchange application was filed over a year prior. Any differences are either a tax due (underestimated income at the application process) or a tax refund (overestimated income at the application process). Form 1095-A from the Exchange is REQUIRED to complete this form.
Penalty Worksheet (No separate tax form; calculated tax from the worksheet is entered on Form 1040.):
This worksheet reports any penalties (shared responsibility payments) from not having minimum essential health coverage. Completion of this worksheet involves pulling information from various sources, will require numerous inquiries or reports to review… and may take well over an hour to prepare. Preparing this tax form, if necessary, is why many tax prep chains are talking about large fee increases. Sadly, it is often the taxpayers who can least afford additional fees that will need this additional filing requirement.
One additional point of emphasis about premium tax credits: There is a good chance that someone could have (honestly) underestimated their 2014 income when they applied for coverage at the Exchange one year ago. This could lead to a tax liability; basically having to “pay back” those prepaid tax credits (which were in the form of premium discounts). This should be a concern only for those who underestimated income by a sizable amount when applying for coverage at the Exchange.
- At tax time, be prepared to supply the following information or documents:
- Form 1095A, B, or C (treat this form just like a W2 or 1099 form… we must have it).
- A listing of each person claimed on your tax return, and whether or not they had health insurance coverage, what company or government program it was through and, if not covered for any portion of the year, which months they were not covered. We will supply a worksheet for this purpose. This will be necessary from all clients.
- Be ready to have extra patience with the additional questions you have never been asked before by your tax preparer, as we work through this first year of ACA reporting.
- If you get insurance through an Exchange, take the time to understand how the Premium Reduction Credits and Premium Tax Credits work so you can avoid tax return surprises.