This year, for the first time, the health insurance taxpayers carry may directly affect the size of the tax refund they receive from the Internal Revenue Service.
Confused? You’re not alone.
The Affordable Care Act has generated several changes to the U.S. tax code, creating tax implications for individuals and businesses. In addition to the tax penalty that individuals can incur if they were without minimum essential coverage during 2014, taxpayers who purchased health insurance from the Health Insurance Marketplace, or the Exchange, and received an Advanced Premium Tax credit will be surprised to learn they may owe the government money to repay that advance.
Individuals with low or moderate income may have received a tax credit, or subsidy, intended to make health insurance purchased through the Exchange more affordable. Those who paid premiums in 2013 would have qualified for a discount based on their 2012 income, according to Carol Markman, a director at EP Caine & Associates in Westbury and a past president of the National Conference of CPA Practitioners.
“They might have provided information [about their salary] that is not accurate in 2014,” she said. “They may have gotten more credit than they were entitled to.”
Calculation of the tax credit was based on an estimate of a taxpayer’s expected family size and income filing status, said Elliot Ratner, tax manager at Garden City-based Israeloff Trattner & Co. Several life changes throughout the year could cause an individual’s status to change and result in a loss of the subsidy. For instance, anyone who had a child, got married or divorced, received a raise or started a new job, and did not notify the Marketplace, may find their advanced credit was too high, resulting in a loss of refund or a balance due, he said.
“Unfortunately, the people getting advanced credits – lower-income taxpayers – will be the most confused,” Markman said, noting although they may be getting a benefit in the form of a tax credit, it will come at a cost of greatly complicated tax returns.
“What’s sad about this is the people who need to fill out these forms are the least qualified to do it,” agreed Saul Brenner, tax partner at Berdon in Jericho. “An individual trying to do this by him or herself is probably going to be left scratching their head trying to figure this out.”
By the end of this month, individuals who enrolled through federal or state marketplaces or exchanges should have received a health insurance marketplace statement, Form 1095-A, issued by the Department of Health and Human Services. The information provided on Form 1095-A will be needed to complete the premium tax credit Form 8962, so the credit can be reconciled against the taxpayer’s actual household income.
Tax preparers are concerned about the number of new forms taxpayers need in order to prepare their 2014 tax returns.
“Taxpayers won’t even know to look for this form,” said Sandra Johnson, a Bellmore certified public accountant and executive vice president of NCCPAP. “Many of our clients don’t even open their mail. They put everything that comes in an envelope marked ‘Important Tax Documents’ in a file folder and bring it to us. We have to hope our clients who went to the Marketplace will do the same. But, if [the form] wasn’t something they were looking for in the past, they aren’t going to look for it.”
In addition, Form 8962 is “a bit overwhelming,” Johnson said. “People who attempt to do their own tax returns, because they can’t afford to pay someone, may not do it correctly or get what they’re entitled to. It’s a bad situation.”
There is also concern about confusion surrounding the various ACA exemptions being granted to those who did not have minimum essential health coverage. While some, such as being a member of a religious sect or a federally recognized Native American tribe, are clear, others are a bit more complicated and may require supporting documentation.
Some exemptions, such as the death of a close family member, are very broad and open-ended, Johnson said.
“[The IRS is] not going back to check how close you were to Aunt Ginny,” she said. “Why her death would give you up to three years of exclusion for having health insurance is baffling to me, yet it is one of the exemptions.”
Other possible exemptions include incarceration, an individual having income low enough that the lowest-cost health plan is more than 8 percent of his or her income, and hardships such as bankruptcy, homelessness and cancellation of utilities.
At press time, several of the new IRS forms, including Form 8965, were still in draft form. Draft instructions for assistance in completing the forms are available, as well, however, “none of this is one size fits all,” Brenner said.
Applications for many of the exemptions requiring advanced certification are available on HealthCare.gov. If accepted, the Marketplace will issue an Exemption Certificate Number that individuals will have to report on their tax returns to avoid any penalties. Other exemptions can be taken at the time of filing.
Individuals who do not meet any of the exemptions and did not have minimum essential coverage will be required to pay a penalty on their return for 2014, Ratner said. While the “penalty is not tremendous,” it is 1 percent of an individual’s 2014 income or $95 per adult – whichever is higher – and $47.50 per uninsured dependent under the age of 18, up to $285 per family.
Still, many taxpayers won’t even realize this is an issue to be concerned with until they go to file.
“No one is focused in very much on this whole issue,” said Michael D’Addio, principal of tax and business services at Marcum in Melville. “During the year, we received some calls from employers, but not so much from individuals. People haven’t really focused on the impact of this law on their tax returns. As people file this year, it will bring it into focus.”