How Obamacare Will Impact Your Individual Tax Return

For hundreds of millions of Americans, it’s that “fun” time again – the IRS tax preparation and filing period!

A process that is already complex, confusing and challenging adds another whole level of agita for the 2014 tax year: the impact of the Affordable Care Act (aka “the ACA” or “Obamacare”) on your tax preparation/filing, and – perhaps — on your tax liability as well.

By way of background…

• Starting in 2014, the ACA’s “individual mandate” required that nearly all Americans have some form of qualifying health coverage, or pay a penalty.
• For 2014, the penalties are the higher of (a) 1% of yearly household income; or, (b) $95 per person ($47.50 per child under 18), to a maximum of $285. In other words, the penalty will be 1% for all households with income of $28,500+.
• The penalties will increase, to a maximum of 2% of household income in 2015, 2.5% in 2016, and then indexed for inflation after that. For some of you, that might mean a smaller refund, no refund or — worst case — a higher tax liability.

What’s the individual impact?

So, by now you’re probably wondering “how does the individual mandate impact me?”

Well, it will depend on your individual circumstances:

1. the vast majority of filers will just have to check the box on line 61 of the (revised) 1040 Form), confirming they had qualifying health coverage throughout the year.
2. those filers who purchased qualifying health coverage through the “Marketplace” (either a state-run or federally-facilitated “exchange”) will also complete and submit the new Form 1095-A.
   1. in addition, Marketplace shoppers who received a premium subsidy (reduced premium payments or “advance premium tax credit”) will also complete and submit Form 8962.
3. those filers who did not have coverage in 2014 may qualify for an exemption. There are over 30 different exemptions available; see here and here for more details.
4. filers who did not have coverage in 2014 and did not qualify for — or qualified but did not apply for — an exemption will likely have to pay a penalty.

So, what should you do to prepare for IRS Affordable Care Act filing?

• if you haven’t done so already, determine which of the above four categories you fit into. That will determine what additional steps you need to take, if any.
• if you purchased coverage through the Marketplace, and especially if you received an advance premium tax credit (reduced premiums), make sure you have all of the supporting documentation. Why?: because the subsidies were paid to the insurance company that underwrote the coverage, not to you. If you have any questions, you should immediately contact either the insurance company or the Marketplace exchange you purchased the coverage through.
• if you didn’t have qualifying health coverage in 2014, carefully examine the available exemptions. One/some might apply to you.
• if you don’t have access to qualifying coverage (e.g., through an employer or Medicare) and you don’t qualify for any of the exemptions, visit the Exchange to see if there is a plan that might fit your individual circumstances – both benefits and cost. You may qualify for the advance premium credit which might make the net cost lower than the escalating penalty amounts.

Related Blog: How to Complete IRS Affordable Care Act Forms

As with all things tax-related, always seek the advice and input of an accountant. Even for self-filers, it’s a good idea to have a professional guide you through this new process for the first time. 

The ACA is the most far-reaching and complex legislation since the passage of Medicare in 1965. For the first time, it is now directly touching every individual who has to file a tax return. Like many things ACA, the first time working through the details of a mandate, and its’ potential impact, is by far the toughest part of the learning curve. If you haven’t already, get started on this curve now­!

Stand by for an upcoming blog on how Obamacare will impact company tax returns!