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Planning for Tax Reporting Under the Affordable Care Act

Though April 15, 2015, is a long way off, it’s time to begin thinking about how the Affordable Care Act will affect your 2014 income taxes.

The Affordable Care Act essentially requires that you and everyone in your family have qualifying insurance known as “minimal essential coverage”; qualify for an exemption; or make  a “Shared Responsibility Payment” (which is essentially treated as an additional tax) when you file your 2014 tax return.

Many of us have health insurance coverage through an employer or through Medicare and Medicaid and will see little impact on our 2014 returns.

Some people gained coverage under the Affordable Care Act during the 2013-2014 open enrollment period.  For Mainers, this would most likely have involved enrollment through the federal exchange, Healthcare.gov, since Maine was not a state that established a state exchange.  Many of this group will have qualified for an Advance Premium Tax Credit which will need to be addressed and reconciled on the 2014 return.

Unfortunately, many remain uninsured.  These people will have the most significant compliance issues relating to the “shared responsibility” payment.

So what can we expect to see on our tax returns.

The first major change on 2014 tax returns will be the requirement that you report your health insurance status when you file your return. For most, this will be a simple process, as you will receive the necessary forms in the mail, similarly to how you receive a W-2 from your employer.

The IRS has issued drafts of these forms, known as the 1095A, 1095B and 1095C.  These are available for review on-line and can be viewed at the IRS Website, www.irs.gov.

Form 1095-A: If you purchased health insurance through the federal or state exchanges, you will receive this form indicating your coverage.

Form 1095-B: This form will come directly from the health insurance company if you sought private insurance outside of the federal or state exchanges.

Form 1095-C: If your employer furnishes your health insurance, your employer will provide you with a 1095-C indicating your coverage.

These forms will contain the information needed for your Form 1040.

The employers and insurance companies will also be filing reports with the Internal Revenue Service to advise the government of the information being furnished to you.

If you are exempt from the individual health insurance mandate, you’ll need to provide documentation on your return.

Some exemptions are granted in the enrollment process on the federal and state exchanges.  Other exemptions are claimed on your tax return.

If you enrolled through an exchange, you should have already received a certificate of exemption. For more information on whether you qualify for an exemption and how to exercise, you can obtain additional information from the federal website, www.healthcare.gov.

There are a number of potential provisions in the law which might alter your federal income tax liabilities and cause you to have to pay more than you expected or receive a reduced refund.

The most widely known tax penalty you could face on your 2014 taxes is the so called “individual mandate.”  This “Shared Responsibility Payment” applies if you or a family member for whom you are responsible did not have minimum essential insurance coverage and don’t qualify for an exemption.

The IRS has published a useful explanation on its website and has issued the following Frequently Asked Questions Guidance.

The IRS has published proposed Form 1040 and Instructions which provide some guidance as to how these matters will be reported.  The Shared Responsibility Payment will be reported on Line 61 of the standard Form 1040 and Form 8965.  A proposed Form 8965 can be reviewed at the IRS website.

There is another potential pitfall which could adversely affect your tax liabilities .  Some people who applied for coverage through federal or state exchanges were eligible for subsidies in the form of an Advance Premium Tax Credit to help cover the costs of their premiums. These subsidies were based on estimated 2014 income that you provided when applying for health coverage on the exchange. If your 2014 tax return shows your actual earnings were higher than estimated, eliminating your eligibility for subsidies or determining you were simply entitled to less, you could have to repay the federal government for the amount of the excess subsidy.

On the other hand, if you didn’t receive an advanced subsidy, you could be entitled to claim a tax credit when you file your tax return.

The IRS has a wealth of information available on its website.  Publication 5120 provides a useful explanation of the Premium Tax Credit.

Need help paying for health insurance premiums?

If you get your health insurance coverage through the Health Insurance Marketplace, you may be eligible for the Premium Tax Credit. This tax credit can help make purchasing health insurance coverage more affordable for people with moderate incomes. The open enrollment period to purchase health insurance coverage through the Marketplace for 2014 ran from October 1, 2013 through March 31, 2014.

The Department of Health and Human Services administers the requirements for the Marketplace and the health plans they offer. For more information about your coverage options, financial assistance and the Marketplace, visit HealthCare.gov.

The Premium Tax Credit

Eligibility

You may be eligible for the credit if you meet all of the following:

  • buy health insurance through the Marketplace;
  • are ineligible for coverage through an employer or government plan;
  • are within certain income limits;
  • do not file a Married Filing Separately return1; and
  • cannot be claimed as a dependent by another person.

It’s your choice

If you are eligible for the credit, you can choose to:

  • Get It Now: have some or all of the estimated credit paid in advance directly to your insurance company to lower what you pay out-of-pocket for your monthly premiums during 2014; or
  • Get It Later: wait to get the credit when you file your 2014 tax return in 2015.

Report changes in circumstances

If you receive advance payment of the premium tax credit to help pay for your insurance premiums, you should report changes such as income or family size to your marketplace when they happen in 2014. Reporting changes will make sure you get the correct amount of the advance payment of the credit. Receiving too much or too little in advance can affect your refund or balance due when you file your 2014 tax return in 2015.

Claim the credit

Whether you choose to get the credit now or later, you must claim it by filing a federal income tax return.

When you file your 2014 tax return in 2015, you will subtract the total of any advance payments you received during the year from the amount of the premium tax credit calculated on your tax return. This may affect your tax refund or balance due. If you are entitled to more credit than you have already received, this will either increase your refund or lower your balance due.


On the draft Form 1040, the Premium Tax Credit will be reported on Line 46.  A reconciliation of the advanced tax credit subsidy will be calculated on Form 8962.  A draft copy of Form 8962 can be reviewed at the IRS Website.

The IRS has not yet released final instructions for the new forms, or details on where taxpayers will enter their health care information on the standard 1040 returns.   You cannot rely upon the proposed Forms and Instructions.  However, as this is all new, it pays to keep abreast of these requirements as they evolve.