For many Americans, understanding the impact of the Patient Protection and Affordable Care Act (ACA) on their upcoming tax returns can seem like a daunting, unrewarding, or even punitive task – like studying exotic derivatives or discussing the finer points of fracking at a dinner party. Understandably, many have put off even thinking about this topic until it comes time to settle-up with Uncle Sam.
With tax filing season now upon us, screens and airwaves have swelled with an abundance of discussions on how to tackle the ACA on our tax returns this year. To combat the overwhelming tide of information (and misinformation), I’ve unpacked the key facts and potential tax implications for most taxpayers.
What is the ACA?
The ACA is a series of laws commonly referred to as “Obamacare” that introduce the following health care insurance requirements.
- Health insurance mandate – Nearly every American is required to have health insurance. The insurance must provide “minimum essential coverage,” which is explained further at healthcare.gov. (A small percentage of taxpayers may be exempt from the requirement to have health insurance based on a list of exemptions published at healthcare.gov.)
- Small business mandate – Beginning January 1, 2015, if you are a business owner who employs more than the equivalent of 50 full-time employees (FTE), including any part-time employees, you must contribute to your employees’ health insurance coverage.
- Premium tax credits – As an individual, if you don’t have coverage through your employer (either because they do not provide it or you are self-employed), you may be eligible for a “premium tax credit” to help you pay for insurance you purchase on your own.
- Fee for uninsured taxpayers – If you don’t have health insurance for three or more months (cumulatively) during 2014, you’ll have to pay a penalty for not having insurance when completing your tax return.
How do I get minimum essential coverage?
Coverage that meets ACA requirements can be obtained through one the following methods:
- Signing up for a plan through your employer
- Obtaining coverage through Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), or other plans provided by government agencies
- Enrolling in a private plan that you purchase through a third-party or through the federal Health Insurance Marketplace at healthcare.gov or your state’s health insurance exchange.
If you don’t have health insurance yet for 2015, the deadline to enroll in a plan is February 15, 2015.
What is the penalty for not having coverage?
If you didn’t have health insurance in 2014, you will use the new IRS Form 8962 when filing your taxes to calculate the penalty. For 2014, the penalty is the greater of:
- $95 per member of your household ($47.50 per child under 18), or up to $285 per family
- 1% of your household’s annual income (For the purposes of this form, annual household income is calculated using the “Taxpayer’s Modified AGI Worksheet for Line 2a” from the Instructions for Form 8962, Page 4, Part 1. (Note: These instructions were not yet finalized by the IRS on the date this article was published.)
Penalty amounts are set to increase significantly in 2015 and future years. A small percentage of people are eligible for an exemption from paying fees – see the full list of fee exemptions at healthcare.gov.
I’m a small business owner. How must I contribute to my employees’ health insurance coverage?
If you meet the requirement described earlier, you will need to ensure your employees have access to health insurance using one of the following methods:
- Provide a health insurance plan to them that meets the minimum essential coverage requirement (described above), OR
- Make Employer Shared Responsibility Payments if any of their employees receives a premium tax credit for purchasing coverage through the Health Insurance Marketplace. The IRS provides an extensive Q&A set on Employer Shared Responsibility requirements.
I need to buy insurance on my own. Do I qualify for premium tax credits?
ACA provides a new “premium tax credit” to qualified taxpayers, offering them lower premiums on plans purchased through the Health Insurance Marketplace or state exchanges. To qualify, your income must fall within a specified range based on the number of people in your household (see below.)
Source: HealthCare.gov (2015)
I qualify for a premium tax credit – how do I get it?
If you qualify for a premium tax credit, you can choose to apply part or all of the credit (up to a pre-determined maximum amount) toward reducing your monthly premiums when you sign-up for an insurance plan in the Health Insurance Marketplace. This is called advance payment of the premium tax credit.
Ultimately, the premium tax credit is calculated when completing Form 8962 along with your tax return, and any differences between the total payments you received during the year and the total credit are reconciled on your return.
- If the amount of advance credit payments you receive in a year is lower than the premium tax credit calculated on your return, the remaining amount will be applied to your overall tax due.
- If the amount of advance credit payments you receive is higher than the premium tax credit on your return, you’ll owe the difference on your tax return.
I received a new tax form in the mail – what is it?
The IRS requires that taxpayers receive one of the following forms certifying their health insurance coverage.
- Form 1095-A – Health Insurance Marketplace Statement – This form certifies that you purchased health insurance through the Marketplace or a state exchange for one or more members of your household. You will use the information on this form to complete Form 8962 with your tax return.
- Form 1095-B – Health Coverage – This form certifies that you enrolled in health insurance coverage for one or more members of your household. (Insurers, employers, and other agencies are not required to provide Form 1095-B until after 2015.)
- Form 1095-C – Employer-Provided Health Insurance Offer and Coverage – This form certifies that you enrolled in health insurance coverage through your employer for one or more members of your household. (Insurers, employers, and other agencies are not required to provide these forms until after 2015.)
The ACA is a complicated health care system that is still experiencing growing pains due to its complexity. Hopefully this article helps provide some clarity towards ACA and your taxes.
Gene Salo is Senior Director at TaxSimple, an online do-it-yourself tax preparation program designed to make filing your personal income taxes easy and convenient.