Tax Headache for Those Who Purchased Health Care Under the Affordable Care Act

in Financial Planning by

It’s proving to be a very challenging tax season for taxpayers who signed-up for health care coverage through one of the marketplaces established under the Affordable Care Act.

You may have recently seen in the news that approximately 800,000 taxpayers who purchased health insurance through the federal Marketplace, HealthCare.gov, received an incorrect Form 1095-A. In addition, the state of California has sent out approximately 100,000 inaccurate forms to consumers that obtained insurance through their state exchange.

Similar to a Form W-2, the Form 1095-A includes important information needed for taxpayers who enrolled in health care coverage through HealthCare.gov or one of the state exchanges to complete and file their federal income tax return. The Form 1095-A details the subsidies the taxpayer received to help pay for their health care insurance.

What you need to know

HealthCare.gov is proactively contacting taxpayers who received incorrect forms and expected to have corrected forms mailed by early March. California said it also expected to have corrected forms mailed by early March. The IRS is encouraging the estimated 800,000 taxpayers impacted to wait until they receive a corrected Form 1095-A before filing their income tax returns.

Most taxpayers affected by the error will find that the credit allowed with the corrected information is lower than would have been allowed using the original information. However, for taxpayers who already filed their federal returns, the IRS has said they won’t collect any additional taxes if the correction on Form 1095-A results in an increase to their tax bill. For taxpayers with an increase in the credit allowed as a result of correction, filing an amended return to claim the additional credit and reduce their total tax is an option.

Reconciling advance tax credits

Even with the correct information, taxpayers who enrolled in health care plans through the Federal or state exchanges may be in for an unpleasant surprise. Many taxpayers who received subsidies to offset the cost of their health care insurance under the Affordable Care Act are discovering that they must pay back some of those subsidies. That’s because those subsidies were actually advance tax credits. Now that they are filing their tax returns, it is time to “true-up” the actual tax credits.

Projected income issues

Another common topic in the news is that many people who enrolled for health care coverage under the Affordable Care Act underestimated their 2014 income, which determined the amount of subsidy they could receive. This is not surprising, since the sign-up period for coverage began in October 2013. Many people looked at their income from 2012 to estimate their 2014 income. Taxpayers who received a raise, were unemployed or underemployed and got a better paying job, or who had a life-changing event such as getting married, getting divorced or having a baby are finding that their actual 2014 income may be significantly different than they projected a year or more prior. If their actual 2014 income is higher than they projected, they are entitled to a smaller subsidy – and now they must pay back the difference. This repayment can be several hundred dollars or more.

On the other hand, if the taxpayer finds that their 2014 income is lower than they projected when they signed up for their health care through one of the exchanges, they are entitled to a higher subsidy, and will receive a higher credit when filing their taxes. This will result in a higher refund or less tax due.

Need more information on the ACA? Read more here.

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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.

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Gene Salo

Gene Salo

Gene “Geno” Salo has worked in the tax industry across a variety of roles for over 20 years. His current position is Senior Director over Tax Simple, an online do-it-yourself tax preparation program designed to make filing your personal income taxes easy and convenient. Geno also serves on the Board of Directors for CERCA (Council for Electronic Revenue Communication Advancement) and is a member of the Free File Alliance, a partnership between the software industry and the IRS to provide free tax return preparation options to consumers. Geno has an MBA from the University of Michigan and is a veteran of the US Air Force. Geno contributes blog articles for Tax Simple customers, and also delivers specialized content direct to tax professionals and CPAs.
Gene Salo

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