Updated: May 7
The following is a summary of many important tax developments, regarding the Affordable Care Act, that have occurred in the past three months that may affect you, your family, and your livelihood. Please call ATBS for more information about any of these matters and what steps you should consider to minimize the impact of these tax developments.
Important Updates | The Affordable Care Act
Potential tax liability for no health insurance coverage for 2014.
Individuals may be subject to a penalty (additional tax) on their 2014 tax return if they did not have health insurance coverage for the full-year. The penalty is the greater of a flat dollar amount ($95 per adult and $47.50 per child) or 1% of the taxpayer’s household income. The penalty is pro-rated if an individual was covered under a qualifying health insurance plan for part of the year, but not the entire year. Generally, an individual or family with no health insurance coverage for 2014 and household income between $45,000 and $55,000 for the year can expect to pay a penalty, on average, between $250 and $450 with their 2014 tax return. This penalty will increase for tax years following 2014.
Availability of premium credit for health insurance purchased on federal exchange.
A premium tax credit is available for qualifying individuals who purchase health insurance on an exchange. The credit is payable in advance if the taxpayer chooses. Income affects the amount of the credit, so the taxpayer must go through a special computation when they file their return to see if they received too much or too little of the credit. A controversy has erupted concerning the credit. The statute makes the credit available for insurance purchased on an exchange established by a state. A federal exchange was established for many states that did not establish their own exchanges. The Internal Revenue Service (IRS) has issued regulations making the credit available for insurance purchased on a federal exchange, but two Circuit Courts reached opposite results on the validity of these regulations. One upheld them, while the other said they were invalid. However, the latter decision was put on hold because, subsequently, that circuit agreed to have the issue considered by all of the judges in the circuit. The Supreme Court has recently agreed to hear this case.
More regulations and guidance on the premium credit.
The regulations allowing the premium tax credit for insurance purchased on a federal exchange were issued in 2012. The regulations also covered other basic matters pertaining to the credit but did not address a number of issues that could come up in specialized situations. Recently, the IRS issued additional regulations on the credit. Among other things, these regulations address the specialized situations that were left out of the 2012 regulations. For example, the regulations explain how to reconcile advance payments with credit amounts in the case of divorced taxpayers and married taxpayers who file separately. The regulations also provide rules for the interaction between the credit and the deduction for the health insurance costs of a self-employed individual. At the same time, the IRS, in separate guidance, provided two optional computation methods that a taxpayer can use to avoid the circular computations that would otherwise apply if they qualified for both the deduction for health insurance costs for self-employed individuals and the premium tax credit.
The purchase of health insurance coverage for 2014 through either the State-Run or Federally-Run Health Care Exchanges (Marketplaces) allowed qualifying individuals to select one of two choices for paying monthly premiums. The first option was to pay full price for monthly health insurance premiums and subsequently claim the Premium Tax Credit on the 2014 tax return. The second, and most popular option, was to estimate 2014 annual income and apply the Premium Tax Credit as a discount to the monthly health insurance premiums. While the second option was more popular because it resulted in lower monthly premium payments, it could cause problems for the end of year taxes if you under estimated your expected income for 2014. The Premium Tax Credit only applies to individuals and/or families with 2014 household income below 400% of the Federal Poverty Limit.
Changes that will affect the Premium Tax Credit include changes in income (pay raises or pay decreases), employment (hiring or termination), or family size (birth, death, or change in dependents). If income increased, an unemployed spouse gained employment, or the number of dependents decreased from a previous year, the advance credit payments received to lower monthly premium payment will be reconciled on your 2014 tax return and any overpayment of the credit will be paid back to the IRS as additional tax. If there was a job loss, decrease in pay, or additional dependent(s) during 2014, the premium tax credit will be reconciled on your 2014 tax return and may produce a potential benefit of an additional credit.
Publication outlines exemptions from penalty for not having health coverage.
The IRS has released Publication 5172, Facts about Health Coverage Exemptions. It is a one-page outline of the exemptions from the individual shared responsibility provisions of the Affordable Care Act (ACA), also referred to as the individual mandate. Under the ACA provision, beginning in 2014, individuals and their family members must have qualified health insurance (i.e., minimum essential coverage), make a shared responsibility payment when filing their federal income tax return, or qualify for an exemption. A taxpayer obtains an exemption from either the Health Insurance Marketplace (Health and Human Services) or the IRS, depending on the type. All exemptions are reported on the taxpayer’s tax return, although a taxpayer is automatically exempt if they don't have to file a return because their income is below the filing threshold for their status. A brief description of the available exemptions and where a particular exemption may be obtained (IRS, Marketplace or Either) follows:
Members of certain religious sects (Marketplace)
Short coverage gap (IRS)
Certain noncitizens (IRS)
Coverage is considered unaffordable (IRS)
Household income below the return filing threshold (IRS)
Members of federally-recognized Indian tribes (Either)
Members of health care sharing ministries (Either)
Hardships (Either depending on which hardship exemption is claimed)
Open Enrollment for 2015.
The Open Enrollment period for calendar year 2015 began November 15, 2014 and continues through February 15, 2015. If you haven’t enrolled in coverage by February 15, 2015, you generally can’t buy Marketplace health coverage for 2015 until the next Open Enrollment period for coverage the following year.
If you’re enrolled in a 2014 Marketplace plan, your benefit year ends December 31, 2014. To continue health coverage in 2015, you can renew your current health plan or choose a new health plan through the Marketplace during the 2015 Open Enrollment period.
If you don’t have health coverage during 2015, you may have to pay a fee. The fee in 2015 is higher than it was in 2014 — 2% of your income or $325 per adult/$162.50 per child, whichever is more.