When Congress passed the Affordable Care Act (ACA) in 2010, the impact on our tax practices seemed far away, and many of us expected the Supreme Court to rule it unconstitutional or for Congress to repeal it. Tax season for 2014 introduced several requirements which must be reported on Form 1040, for all taxpayers of all ages as they report whether they have qualified health insurance for the entire year. Remember, this requirement to obtain health insurance applies to each person as well as anyone claimed as a dependent on a taxpayer’s return. This is a significant change in what we must do to help our clients comply with tax laws and will certainly result in larger tax fees to the clients. We must be prepared to gather additional information from our clients in order to properly prepare Form 1040, and clients will have questions about ACA as it now becomes relevant to them. The CPA is a client’s most trusted advisor, and this will be another element for which they will look to us to provide insight and guidance.
The Affordable Care Act was passed in 2010. It was passed with an expectation to overhaul certain aspects of the U.S. healthcare system and affects nearly all taxpayers, many employers, and various elements of the healthcare industry. ACA represents the most significant change to our healthcare laws since the passage of Medicaid and Medicare in 1965.
The fundamentals of ACA are that every U.S. citizen must have health insurance unless an individual meets one of the following exemptions:
• Financial hardship
• Religious objections
• American Indians
• Individuals without coverage for less than 3 months
• Aliens not lawfully present in the United States
• Incarcerated individuals
• Individuals whose lowest cost plan option exceeds 8% of household income
• Individuals with income below the tax filing threshold ($9,750 single; $19,500 married filing joint)
There are many options for obtaining health insurance:
• Job-based coverage
• Private policy
• Medicare or Medicaid
• Health insurance through one of the marketplace exchanges
If an individual cannot afford health insurance, subsidies are given through a premium tax credit (PTC). The PTC is an advanceable, refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange. If a taxpayer chooses to have the credit paid in advance, it will be necessary to reconcile the amount paid in advance with the actual credit computed on their tax return.
Learn more about the Marketplace at https://www.healthcare.gov/
The PTC is based on household size, household income, and where it falls within the federal poverty line (FPL). Subsidies are available up to 400% of the FPL. Up to 133% of the FPL, a family needs to devote 2% of its income toward the premium, with the balance subsidized by the government. The subsidy then decreases as income goes up.
The 2013 amounts for the FPL are used to calculate eligibility for the PTC for 2014. For residents of one of the 48 contiguous states or Washington, D.C., the following illustrates when household income would be between 100 percent and 400 percent of the 2013 FPL:
• $11,490 (100%) up to $45,960 (400%) for one individual.
• $15,510 (100%) up to $62,040 (400%) for a family of two.
• $23,550 (100%) up to $94,200 (400%) for a family of four.
For the 2014 federal poverty line amounts which the PTC for 2015 will be based go to: https://www.healthcare.gov/glossary/federal-poverty-level-FPL/
To measure income for the PTC, take the taxpayer's modified adjusted gross income plus any income received by a qualified dependent who is required to file a federal income tax return. This will require the knowledge of income reported by dependents who file a separate return but are claimed by a different taxpayer. Modified adjusted gross income is the adjusted gross income on their federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI).
A taxpayer is eligible for the PTC if all of the following requirements are met:
• Purchase coverage through the Marketplace
• Have household income that falls within a certain range
• Are not able to get affordable coverage through an eligible employer plan that provides minimum value
• Are not eligible for coverage through a government program, such as Medicaid, Medicare, CHIP, or TRICARE
• Do not file a Married Filing Separately tax return (unless you meet the criteria in section 1.36B-2T(b)(2) of the Temporary Income Tax Regulations, which allows certain victims of domestic abuse and spousal abandonment to claim the premium tax credit using the Married Filing Separately filing status.)
• Cannot be claimed as a dependent by another person
The PTC has two characteristics that make it unique among the refundable income tax credits. First, the PTC may be paid to insurers on a taxpayer’s behalf or, if not, paid to the taxpayer. Second, the PTC may be paid during the year or, if not, at the time taxes are filed. Further, if the amount paid turns out to be wrong (for example, if the taxpayer doesn’t correctly guess his income when applying for the subsidies) the taxpayer will be liable for repaying the excess PTC received to the IRS.
Any taxpayer enrolled in an employer-sponsored plan, including retiree coverage, is not eligible for the PTC even if the plan is unaffordable or fails to provide minimum value.
Changes in circumstances that can affect the amount of actual premium tax credit include:
• Increases or decreases in your household income
• Birth or adoption of a child
• Other changes to your household composition
• Gaining or losing eligibility for government sponsored or employer sponsored health care coverage
There is no government-run insurance plan or single payer system established under the ACA. The government only runs the exchanges, while the insurance industry submits policies to be offered by the exchanges.
Those who receive the Advance PTC (APTC) must file a federal income tax return for that year. The tax return will be used to reconcile the difference between the advance credit payments received and the actual amount of the credit the taxpayer is entitled to receive. Also, anyone eligible to receive the PTC will be required to file an income tax return to utilize the PTC. This filing requirement applies whether or not an individual would otherwise be required to file a return.
Married taxpayers must file as married filing jointly in order to receive the PTC unless the taxpayer meets the criteria in section 1.36B-2T(b)(2) of the Temporary Income Tax Regulations, which allows certain victims of domestic abuse and spousal abandonment to claim the premium tax credit using the Married Filing Separately filing status. Taxpayers may claim this relief from the joint filing requirement for no more than three consecutive years. As an alternative, determine if the taxpayer is eligible to file as Head of Household. Review the rules which allow a married taxpayer who lives apart from his or her spouse for the last six months of the taxable year to be considered unmarried if he or she files a separate return, maintains as the taxpayer’s home a household that is also the main home of a dependent child for more than half the year, and furnishes over half the cost of the household during the taxable year.
It has been reported that approximately 8 million previously uninsured Americans gained coverage under the ACA during 2013-2014.
It is worthy to note the multiple possibilities of mistakes that could be made primarily by the taxpayer’s dependents who work in 2014. The taxpayer is responsible for ensuring that all dependents reported on their return had minimum coverage. The simplest guidance may be client education. Inform your clients that for this year, do not allow any of their dependents (particularly college students) to file their own return without your assistance or review. Although this guidance may appear self-serving, it is meant to protect clients from their dependents inadvertently costing them literally thousands of dollars in potential health care tax credits.
The short list of new IRS forms and changes to Form 1040 for 2014 includes three new lines related to the ACA health insurance mandate. Based on the IRS 1040 instructions as of January 26, 2015:
• In the section for Taxes and Credits:
Form 1040 Line 46: Excess advance premium tax credit repayment. Attach Form 8962.
From the Instructions as of October 5, 2014: The premium tax credit helps pay premiums for health insurance purchased from the Health Insurance Marketplace. If advance payments of this credit were made for coverage for you, your spouse, or your dependent, complete Form 8962. If the advance payments were more than the premium tax credit you can claim, enter the amount, if any, from Form 8962, line 29.
If you enrolled someone who is not claimed as a dependent on your return or for more information, see the instructions for Form 8962.
• In the section for Other Taxes:
Form 1040 Line 61: Health care: individual responsibility (see instructions) Full-year coverage check the box.
Beginning in 2014, individuals must have health care coverage, qualify for a health coverage exemption, or make a shared responsibility payment with their tax return.
If you had qualifying health care coverage (called minimum essential coverage) for every month of 2014 for yourself, your spouse (if filing jointly), and anyone you could or did claim as a dependent, check the box on this line and leave the entry space blank.
Otherwise, do not check the box on this line and see the instructions for Form 8965.
Minimum essential coverage.
Most health care coverage that people have is minimum essential coverage.
Minimum essential coverage includes:
• Health care coverage provided by your employer,
• Health insurance coverage purchased through the Health Insurance Marketplace,
• Many types of government-sponsored health coverage including Medicare, most Medicaid coverage, and most health care coverage provided to veterans and active duty service members, and
• Certain types of coverage purchased directly from an insurance company. See the instructions for Form 8965 for more information on what qualifies as minimum essential coverage.
Premium tax credit. If you, your spouse, or a dependent enrolled in health insurance through the Marketplace, you may be able to claim the premium tax credit. See the instructions for line 69 and Form 8962.
• In the section for Payments:
Form 1040 Line 69: Net premium tax credit Attach Form 8962.
You may be eligible to claim the premium tax credit if you, your spouse, or a dependent enrolled in health insurance through the Health Insurance Marketplace. The premium tax credit helps pay for this health insurance. Complete Form 8962 to determine the amount of your premium tax credit, if any. Enter the amount, if any from Form 8962, line 26. See Pub. 974 and the instructions for Form 8962 for more information.
The first item is Form 1095. Almost every taxpayer who has health insurance coverage should be receiving one or more Form 1095s. We must educate our clients about this new form and let them know the importance of getting them to us with their tax information.
Form 1095-A – This is a form taxpayers should be receiving from the Exchange that will be reporting the coverage they have as well as any advanced premium credits the taxpayer received for a subsidized plan.
The IRS instructions with Form 1095-A state: “You received this Form 1095-A, because you or a family member enrolled in health insurance coverage through the Health Insurance Marketplace. This Form 1095-A provides information you need to complete Form 8962, Premium Tax Credit (PTC). You must complete Form 8962 and file it with your tax return if you want to claim the premium tax credit or if you received premium assistance through advance credit payments (whether or not you otherwise are required to file a tax return). The Marketplace has also reported this information to the IRS. If you or your family members enrolled at the Marketplace in more than one qualified health plan policy, you will receive a Form 1095-A for each policy.”
Form 1095-B – This form will be sent to taxpayers who had health insurance coverage “off the Exchange.” This would primarily be that the taxpayer had an ACA compliant health insurance policy for all of 2014. The policy might have been an individual plan purchased directly from an insurance company (off the Exchange) or could include Medicare or Medicaid.
The IRS instructions with Form 1095-B state: “This Form 1095-B provides information needed to report on your income tax return that you, your spouse and individuals you claim as dependents had qualifying health coverage (referred to as “minimum essential coverage”) for some or all months during the year. Individuals who do not have minimum essential coverage and do not qualify for an exemption may be liable for the individual shared responsibility payment. Minimum essential coverage includes government-sponsored programs, eligible employer-sponsored plans, individual market plans and miscellaneous coverage designated by the Department of Health and Human Services. For more information on minimum essential coverage, see Pub. 974, Premium Tax Credit (PTC).”
Form 1095-C - This form will be sent to taxpayers who had health insurance coverage “off the Exchange” which was provided to them by their employer.
The IRS instructions with Form 1095-C state: “This Form 1095-C includes information about the health coverage offered to you by your employer. Form 1095-C, Part II, includes information about the coverage, if any, your employer offered to you and your spouse and dependent(s). If you purchased health insurance coverage through the Health Insurance Marketplace and wish to claim the premium tax credit, this information will assist you in determining whether you are eligible. For more information about the premium tax credit, see Pub. 974, Premium Tax Credit (PTC).”
The Forms 1095 B & C are the easiest to report and deal with because those taxpayers will not be subject to any penalties, premium tax credits or return of exchange subsidies. However, because much of the reporting for 2014 is voluntary, not all taxpayers will receive any of the variations of Form 1095 and then you, as the tax preparer, will have the burden of attempting to assist your clients report the required information.
Information reported on employee’s W-2. The ACA requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee.
Many employers are eligible for transition relief for tax-year 2012 and beyond, until the IRS issues final guidance for this reporting requirement. Certain employers are exempt from the requirement to report the cost of coverage on Forms W-2. The transition exemption applies to the following: 1) employers filing fewer than 250 Forms W-2 for the previous calendar year; 2) multi-employer plans; 3) Health Reimbursement Arrangements; 4) dental and vision plans; 5) self-insured plans of employers not subject to COBRA continuation coverage or similar requirements; 6) employee assistance programs, on-site medical clinics, or wellness programs for which the employer does not charge a premium under COBRA continuation coverage or similar requirements; and 7) employers furnishing Forms W-2 to employees who terminate before the end of a calendar year and request a Form W-2 before the end of that year.
For more Q&A related to W-2 reporting of health insurance coverage go to:
Notice 2012-9 http://www.irs.gov/pub/irs-drop/n-12-09.pdf
Or to read the Instructions for 2014 W-2s
Employer responsibility to offer health insurance. This article is focused on the individual reporting responsibilities on Form 1040. It should be noted that 96 percent of employers are not subject to ACA reporting requirements or the employer responsibility provision because they have fewer than 50 employees. For a discussion of the employer responsibilities go to:
Full version of Final Regulations - https://s3.amazonaws.com/public-inspection.federalregister.gov/2014-05050.pdf
The amount reported does not affect tax liability of the employee, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee's income, and it is not taxable. This reporting is for informational purposes only and will provide employees useful and comparable consumer information on the cost of their health care coverage.
Form 8962 (Premium Tax Credit) - If the taxpayer purchased health insurance through one of the exchanges (also known as the marketplace), new tax Form 8962 (Premium Tax Credit) must be filed. When the taxpayers obtained their health insurance policy via the exchange, they submitted estimates of their 2014 income, which was used by the exchange to determine their premium. A significant number of these taxpayers were granted a subsidy for their premium via “advanced credits.” The purpose of Form 8962 is to reconcile the correct amount of premium tax credit the taxpayer is entitled based on their actual income reported on Form 1040 for 2014.
Who must file Form 8962? You must file Form 8962 with your income tax return (Form 1040, Form 1040A, or Form 1040NR) if any of the following apply to you:
• You are taking the PTC.
• Advanced Premium Tax Credit (APTC) was paid for you or another individual in your tax family.
• APTC was paid for an individual for whom you told the Marketplace you would claim a personal exemption, if no one else claims a personal exemption for that individual.
As you complete Form 8962, it will result in one of the following for the taxpayer: 1) the taxpayer owes additional tax because the advanced credits received by the taxpayer will have been greater than the allowable premium tax credit; 2) the taxpayer will have a refundable tax credit because the advanced credits they receive was in fact less than the allowable premium tax credit; or 3) the taxpayer will have neither because perhaps a premium tax credit was not received and nothing is due, or, in a small percentage of returns, the advanced premium credit allowed matches up with the allowable premium tax credit.
The IRS instructions with Form 8962 state: “Complete Form 8962 only for health insurance coverage in a qualified health plan (described later) purchased through a Health Insurance Marketplace (also known as an exchange). This includes a qualified health plan purchased on www.healthcare.gov.”
As you gather information to prepare the Form 8962, you will need the following information from the taxpayers:
1. Health insurer(s) for the year;
2. Number of months of coverage;
3. Members of your family covered by the above health insurance throughout the year;
4. Taxpayer’s county of residence all year;
5. Signed health insurance information.
To read the full Instructions for Form 8962 (in draft form as of September 18, 2014):
To get more details/facts about the Premium Tax Credit the IRS has published the following Tax Publications:
Publication 5120 –Your Credit, Your Choice – Get it Now or Get it Later http://www.irs.gov/pub/irs-pdf/p5120.pdf
Publication 5121 –Need help paying for health insurance premiums? http://www.irs.gov/pub/irs-pdf/p5121.pdf
Publication 5152 –Report changes to the Marketplace as they happen http://www.irs.gov/pub/irs-pdf/p5152.pdf
Form 8965- Health Coverage Exemptions and instructions. A state or federal exchange needs to issue Form 8965 for certain types of exemptions (like religious), and for other types of exemptions (such as a short coverage gap) the taxpayer may self-prepare the Form 8965.
Who must file Form 8965? If you are required to file a tax return and you want to claim a coverage exemption for yourself or another member of your tax household, you must file Form 8965. Attach Form 8965 to your return (Form 1040, Form 1040A, or Form 1040EZ). If you are not required to file a tax return, your tax household is exempt from the shared responsibility payment and you do not need to file a return to claim the coverage exemption. If you are not required to file a tax return but choose to file anyway, claim the coverage exemption on line 7a or 7b. (See the instructions under Part II, later.)
Only one Form 8965 should be filed for each tax household. If you can be claimed as a dependent by another taxpayer, you do not need to file Form 8965 and do not owe a shared responsibility payment.
Even if you do not need to report or claim a coverage exemption, you will need to use the Shared Responsibility Payment Worksheet included in these instructions to calculate the shared responsibility payment if you or another member of your tax household did not have minimum essential coverage or a coverage exemption for one or more months.
**For 2014, the payment is either $95 per adult and $47.50 per child (up to $285 for a family) or 1% of household income. For 2015, it’s either $325 per adult and $162.50 per child (up to $975 for a family) or 2% of household income. For 2016, it’s either $695 per adult and $347.50 per child (up to $2,085 for a family) or 2.5% of household income. Per the IRS Website, “the individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014.” As has been widely publicized, the shared responsibility payment is not enforceable by the IRS. That means the IRS will offset the payment against tax refunds due, but it can’t file liens, levy assets or start collection proceedings for this payment.**
The open enrollment period to purchase health insurance coverage for 2015 through the Health Insurance Marketplace runs from Nov.15, 2014 through Feb. 15, 2015. The Marketplace is where clients can find health insurance coverage. Visit the Marketplace to find information about: 1) health insurance options, 2) how to purchase coverage, and 3) how to get financial assistance with the cost of insurance. Visit the Department of Health and Human Services website at HealthCare.gov to learn more about coverage options, financial assistance and how clients can enroll in coverage through the Marketplace.
The IRS publication that will help you learn about how the Affordable Care Act affects taxes is IRS Publication 5187, Health Care Law: What’s New for Individuals and Families, available at IRS.gov/aca. While the health care law has several parts, this publication breaks down what’s new for the 2014 federal tax returns you will be filing in 2015.”
This publication was released by the IRS on December 18, 2014. It is only 21 pages long and gives you an excellent resource. http://www.irs.gov/pub/irs-pdf/p5187.pdf
For additional information on information related the Affordable Care Act go to IRS.gov
The following is a listing of topics covered there:
It’s Not Too Late to Report Changes in Circumstances that May Affect Your Premium Tax Credit
Health Care Tax Tip 2014-22, Oct. 31, 2014
Information for Employers about Their Responsibilities Under the Affordable Care Act
Health Care Tax Tip 2014-21, Oct. 16, 2014
Small Employers Should Check Out the Health Care Tax Credit
Health Care Tax Tip 2014-20, Oct. 8, 2014
New IRS Publication Helps You Find out if You Qualify for a Health Coverage Exemption
Health Care Tax Tip 2014-19, Sept. 23, 2014
The Individual Shared Responsibility Payment
Health Care Tax Tip 2014-18, Sept. 16, 2014
Moving Can Affect Your Premium Tax Credit
Health Care Tax Tip 2014-17, Sept. 12, 2014
Getting Married Can Affect Your Premium Tax Credit
Health Care Tax Tip 2014-16, Aug. 26, 2014
IRS: Now is the Time for a Mid-Year Premium Tax Credit Checkup
Health Care Tax Tip 2014-15, Jul. 18, 2014
IRS.gov has information about the health care law and its effect on your taxes
Health Care Tax Tip 2014-14, Jul. 16, 2014
Find out if You Qualify for a Health Insurance Coverage Exemption
Health Care Tax Tip 2014-13, Apr. 17, 2014
Find Out if Your Health Insurance Coverage is Considered Minimum Essential Coverage Under the Affordable Care Act
Health Care Tax Tip 2014-12, April 10, 2014
Time May be Running Out -- March 31 is an Important Deadline
Health Care Tax Tip 2014-11, March 25, 2014
What do I need to know about the Health Care Law for my 2013 Tax Return?
Health Care Tax Tip 2014-10, March 18, 2014
What You Need to Know about the Amount of Health Insurance Reported on Form W-2
Health Care Tax Tip 2014-09, March 13, 2014
Small Business Health Care Tax Credit
Health Care Tax Tip 2014-08, March 10, 2014
Changes in Circumstances can Affect your Premium Tax Credit
Health Care Tax Tip 2014-07, March 25, 2014
Four Tax Facts about the Health Care Law for Individuals
Health Care Tax Tip 2014-06, March 11, 2014
Three Timely Tips about Taxes and the Health Care Law
Health Care Tax Tip 2014-05, March 6, 2014
The Individual Shared Responsibility Payment - An Overview
Health Care Tax Tip 2014-04, March 20, 2014
The Premium Tax Credit
Health Care Tax Tip 2014-03, February 25, 2014
The Health Insurance Marketplace - Learn about Your Health Insurance Coverage Options
Health Care Tax Tip 2014-02, February 25, 2014
IRS Reminds Individuals of Health Care Choices for 2014
Health Care Tax Tip 2014-01, February 25, 2014
IRS Website Explains Tax Provisions of the Health Care Law; Provides Guide to Online Resources
Health Care Tax Tip 2013-01, August 15, 2013