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The Affordable Care Act: What Tax Practitioners Have to Know

Mar 9th 2015
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The past year—2014—is the first year taxpayers are required to report healthcare coverage on their individual tax returns under the Affordable Care Act. These requirements present new challenges for tax practitioners in terms of determining whether clients have qualifying health insurance or are eligible for an exemption from the mandate, in addition to calculating any penalties, and determining eligibility for the premium tax credit.

From a high level, the Affordable Care Act requires all taxpayers do at least one of three things:

  • Have qualifying health insurance coverage for each month of the year.
  • Have an exemption from the requirement to have coverage.
  • Make an individual shared responsibility payment when filing a federal income tax return.

For most, it is simply a matter of checking a box on Form 1040 to indicate that everyone listed on the front of the return had qualifying healthcare coverage for the entire year. For individuals in one or more categories, practitioners will need to pay close attention to guidance that covers their particular situation.

Determining minimum essential health insurance coverage

The first step for tax practitioners is determining whether an individual had minimum essential health insurance coverage for each month during the year. Generally, minimum essential coverage includes coverage under an employer-sponsored health plan, Medicare, Medicaid, CHIP, TRICARE, or an individual insurance policy—all of which must provide more than limited benefits such as vision or dental.

Individuals with adequate coverage under an individual policy purchased through a state insurance marketplace will have received a Form 1095-A (Health Insurance Marketplace Statement) reporting the coverage, and may qualify for a premium tax credit. It’s important to keep a copy of this form in your workpapers. If the client had coverage through another source, make sure to document what evidence was reviewed to support the conclusion that the client and every family member had adequate coverage for the entire year. The IRS has stated that for 2014, an individual’s statement that he or she had coverage may be sufficient evidence; however, practitioners are expected to use due diligence.

Understanding the individual shared responsibility penalty

For any month during the year that an individual did not have minimum essential coverage and did not qualify for a coverage exemption, they will need to make an individual shared responsibility payment with their tax return. They are considered to have minimum essential coverage for the entire month as long as they are enrolled in and entitled to receive benefits under a plan that provides minimum essential coverage for at least one day during that month.

An individual may be exempt from the requirement to have qualifying healthcare coverage if one of the following applies:

  • The minimum amount they must pay for the annual premiums is more than 8 percent of their household income.
  • They have a gap in coverage that is less than three consecutive months.
  • They qualify for an exemption for one of several other reasons, including having a hardship that prevents them from obtaining coverage, or belonging to a group explicitly exempt from the requirement.

Practitioners should note that a general hardship exemption can only be granted by the state marketplace. An individual may qualify for a general hardship exemption because of homelessness, being evicted, domestic violence, bankruptcy, substantial debt due to medical expenses, and many other factors. The IRS has not determined what documentation a practitioner must have to prove the client qualifies for an exemption that is not granted by a state marketplace, but claimed on the individual’s tax return. Cautious practitioners will carefully document why a client qualifies for an exemption that was not granted by the state marketplace.

If you determine any individual are exempt, they will not have to make a shared responsibility payment when filing their 2014 federal income tax return. For any month that they did not qualify for a coverage exemption, they will need to have minimum essential coverage or make a shared responsibility payment.

Understanding the premium tax credit

The purpose of the premium tax credit is to help make purchasing health insurance coverage more affordable for people with moderate incomes. Those who have purchased health insurance coverage through the Health Insurance Marketplace may be eligible for the premium tax credit if they meet all of the following:

  • Are ineligible for coverage through an employer or government plan.
  • Are within certain income limits.
  • Do not file a "Married Filing Separately" tax return (unless they meet criteria 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.

During enrollment, the Health Insurance Marketplace uses information taxpayers provide about their projected income and family composition for the year to estimate the amount of premium tax credit they will be able to claim on their tax return. At that time, individuals chose either to “get it now” by having some or all of the estimated credit paid in advance directly to their insurance company to lower out-of-pocket monthly premiums; or “get it later,” which involves waiting to get all of the credit when they file their tax return.

Those who chose to have advance credit payments sent to their insurer must file a federal income tax return, even if otherwise not required to file. They must complete Form 8962, Premium Tax Credit (PTC) to claim the premium tax credit and reconcile their advance credit payments with the premium tax credit they are eligible to claim on their return. If the amount is less than the actual premium tax credit, they will get the difference as a higher refund or lower tax due. If the advance credit payments that were paid to their health care provider were more than the actual credit, they may need to pay some or all of the difference with their tax return (or reduce their tax refund), depending on their income level.

Taxpayers enrolled in coverage through the Marketplace, but who didn’t get the benefit of advance credit payments during 2014, may be able to claim the premium tax credit when they file their return.

To help smooth the process for the first year of the Affordable Care Act, the IRS will waive penalties related to late payments or underpayment of estimated tax for eligible taxpayers if they resulted from repayment of excess advance payments of the premium tax credit for Marketplace coverage.

About the author:

Blake T. Smith, CPA, is senior director of product development with the Tax & Accounting business of Thomson Reuters, where he oversees product development and editorial operations for the PPC Tax and Quickfinder product lines.

Related article:

7 Steps to Understanding the Affordable Care Act This Tax Season


Replies (1)

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By Suave
Jun 25th 2015 20:12 EDT

I have clients who have to pay back thousands in premium tax credits due to lump sum distributions which doubled their annual income. Where is the IRS publication which says they will waive the penalty?

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