The Affordable Care Act, also known as the ACA or Obamacare, was passed in 2010, but its most significant changes are taking effect this year and next. The Individual Mandate took effect on January 1, 2014, requiring most Americans to have health insurance. Along with the Individual Mandate come new tax rules, including penalties and credits that affect people who bought insurance on a marketplace.
How do you know if the Affordable Care Act will affect your taxes this year? We put together this Q&A to help answer some of the most popular questions about the ACA, the IRS, and more acronyms.
I have health insurance through my employer. Do I need do anything special?
People with employer-sponsored health insurance will have to check a new box on their tax returns stating that they had coverage for the entire year, but besides that, their annual tax routine has not changed. According to the last census, approximately 70% of people get health insurance through their employer.
I have health insurance, but not from an employer or the marketplace. Do I have to do anything special?
The Individual Mandate requires that most Americans have what’s called "minimum essential coverage." Marketplace insurance plans and employer-provided health plans count as minimum essential coverage, but so do COBRA plans, retiree plans, most Medicare and Medicaid coverage, and, if you’re under 26, a parent’s insurance plan. (Read the full list of what counts as minimum essential coverage.)
As long as you have minimum essential coverage, you can check the box on your 1040 tax return stating that you had health insurance.
What if I didn’t have health insurance for all or part of 2014?
If you didn’t have health insurance for less than three months, you will not incur a penalty.
If you didn’t have health insurance for more than three months, you will have to pay a penalty. For the 2014 tax year, that penalty will be the higher of these two amounts:
1% of your yearly household income. (Only income above the tax filing threshold is counted.)
$95 per person ($47.50 per child under 18).
These penalties will increase every year until 2016. After that, it will be adjusted for inflation. You can use this tool to calculate your penalty.
What if I didn’t have health insurance but I think I qualify for an exemption?
Well, definitely confirm that you’re exempt. There are a lot of exemptions - most of them related to economic hardship - and the U.S. government has put together a pretty good tool to help you figure out if you qualify for any of them. (The U.S. government put together something useful? It happens sometimes.) After that, you have to apply for the exemption, but as long as everything checks out, you won’t have to pay a penalty when you file your taxes.
Why am I getting more tax forms than last year?
It’s like my grandmother always said, "with tax penalties and credits comes more tax forms." The major new tax form is Form 1095, which acts as your proof of insurance. You’ll get a different version of Form 1095 depending on where you got your insurance from: the marketplace (1095-A), other insurers (1095-B), or your employer (1095-C).
For the 2014 tax year, the IRS is going by the "honor system" for any insurance plan not provided by the marketplace, so don’t be surprised if you don’t get a 1095-B or a 1095-C this year. Starting with the 2015 tax year, these forms will be mandatory, because as any elementary school teacher will tell you, the honor system is not enough.
If you bought your insurance on the marketplace, you will need your 1095-A to file your Premium Tax Credit form.
Do I need to file a Premium Tax Credit form?
If you bought your insurance on a marketplace, you may have been eligible for a Premium Tax Credit. At the time of purchase, the marketplace should have helped you calculate your Premium Tax Credit based on your estimated income.
There are two ways you can claim your Premium Tax Credit. You can either have it sent directly to your health insurer to help lower the cost of your premiums or you can claim the entire credit when you file your taxes. (There’s actually a third option: only having part of your Premium Tax Credit sent to the health insurer. More on this later.)
Either way, you need a file a Form 8962. Form 8962 helps you calculate whether or not you deserve more Premium Tax Credit than you received or if they gave you too much Premium Tax Credit. To put it more simply: does the government owe you money or do you owe the government money?
[caption id="attachment_5423" align="aligncenter" width="1600"] Photo by 401K Calculator.[/caption]
If you received a Premium Tax Credit and applied all of it to your monthly premium cost, there are three things that could happen:
if your income was higher than your estimate at the time of purchase, your Premium Tax Credit will be reduced and you will have to pay the difference when you file your taxes
if your income was the same as your estimate, nothing will happen
if your income was lower than your estimate, your Premium Tax Credit will be increased and you will get a credit when you file your return
If you received a Premium Tax Credit, but decided not to apply it to your premiums in advance, you will still have to reconcile your estimated income with your real income. The size of your credit may change, but unless you earned enough money that you no longer qualify for the credit, you will still get the credit when you file your return. Since you did not receive any credit in advance, there is no risk that you’ll have to pay anything to the government.
If you received a Premium Tax Credit, but only applied some of it to your premiums, you will, of course, have to reconcile your estimated income with your real income. Like the two situations above, you will either end up getting a credit from the government or end up paying money back. This situation is a little more complicated than the other two because you’ve only received part of the credit, so even if your credit ends up being reduced, you might still get money back from the government.
There is a limit to how much you’ll have to pay back if you make less than 400% of the federal poverty line. If you go over that cap, you’ve lost eligibility for the Premium Tax Credit and will have to pay the full credit back to the government.
Why is this so complicated?
Because it’s the IRS.
Is there any way to make this simpler without having to pay for an accountant?
Yes! There are a remarkable amount of resources for filing your taxes, especially for lower income families.
If you earn less than $53,000 per year, you can get help from the Volunteer Income Tax Assistance program, which also helps people with disabilities, the elderly, and taxpayers who speak limited English. All volunteers are IRS-certified.
You can also do your taxes yourself using software (TurboTax is a popular example). If you make less than $60,000 per year, you can get some of this software for free using IRS Free File. This software will walk you through the process of filing your taxes, automatically doing most of the hard work for you.
If you do end up paying for someone to help your file your taxes, remember that you can deduct tax preparation fees on your tax return.
What should I do with my tax refund?
Whatever you do, don’t blow it on a new TV or car or dinners out or a giant party or anything that you don’t really need.
There’s more than one smart thing you can do with your tax refund - you can toss the money in a savings account for a rainy day, put it in your retirement fund, or even use it to pay your health insurance premiums until the next tax refund.
We also suggest looking at a life insurance policy. Life insurance is one of the easiest ways to protect your family from unforeseen circumstances. After getting a life insurance policy, you can use your tax refund to pay monthly or annual premiums. Read more about what life insurance is and why you need it, or get a free life insurance quote now.