Biggest Tax Code Change in 20 years!
The Affordable Care Act (ACA) is one of the biggest changes to the tax code in 20 years.
And we’re only beginning to digest many confusing health-care-related tax rules that will directly hit 25 million to 30 million taxpayers.
Question: Did you receive financial assistance up front to buy health insurance through a federal or state marketplace? Or did you go without health insurance for all or part of 2014? A major tax preparation firm expects that one in four of its clients in some way will be directly impacted by ACA.
So here are the top five things you need to know:
- You might not get away with just a $95 fine if you skipped health coverage in 2014 and don’t qualify for an exemption. Many people have heard that the tax penalty is just $95, but a married couple making $65,000 in 2014 could face a penalty of about $450 if they went without health insurance coverage last year. In 2014, the fee could be $95 for each uninsured person in the household or $47.50 for each child under age 18. The maximum penalty would be $285 for a family under that method. But higher-income households could pay more than a flat fee. You’d pay whatever is higher. The penalty could be about 1% of your household income after adjustments. The calculation involves reducing household income by the filing threshold amount and then multiplying that amount by 1%. In 2015, the penalty is significantly higher.
- You cannot file your taxes without paying attention to health insurance coverage. Tax filers who obtained coverage through the marketplace cannot file a tax return without the new Form 1095-A, which should arrive soon.“Please make sure you get your 1095-A before filing,” said Internal Revenue Service Commissioner John Koskinen in a media call. The tax filer would need to file an amended return down the road, creating more trouble, if you file without the 1095-A.If you had health insurance through an employer last year, your health insurance coverage would be reported on your W-2 Form and you’d check a box. About 75% to 80% of tax filers would fall under the just check-a-box arena.If Form 1095-A is lost, never shows up, or is wrong, taxpayers must contact their marketplace directly.
- An advance Premium Tax Credit will cut into some tax refunds. The advance credit goes to the insurance company to reduce initial out-of-pocket costs for monthly premiums for those who qualify. The credit is based on actual household income and family size for the year reflected on the tax return. To obtain the upfront credit, people had to forecast their income for 2014. At tax time, you need to reconcile reality with forecasts and could owe money. Worse yet: About 66% of consumers surveyed had no idea that taking the Premium Tax Credit in advance could impact the amount of their tax refund. Form 8962 is needed for the Premium Tax Credit. A household with income below 400% of the federal poverty level would pay back a maximum of $1,250 for single taxpayers and $2,500 for married households.The IRS said there will be limited relief on some penalties. The tax filer who owes money relating to receiving too much advance premium credit would not also owe a penalty for failure to timely pay the tax at the time required nor the penalty for underpayment of estimated tax on that amount, said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting U.S.
- New forms rule the day. Form 8965 needs to be filed with your tax return if someone didn’t have health coverage for part of 2014. This form is needed to see if maybe you’d qualify for an exemption and avoid paying a penalty.
- This is not the year to drag your feet. If you faced a hardship in 2014 that prevented you from obtaining health insurance, you may need more time to get an exemption. A hardship exemption needs to be obtained from the marketplace, including homelessness, eviction, bankruptcy, foreclosure, domestic violence, experiencing a flood, death of a close family member, utility shutoff and unpaid medical bills. But some exemptions, such as if coverage is considered unaffordable, can be claimed on the tax return. Best to get moving early.
Be aware that penalties are going up in 2015. Those who are uninsured and do not qualify for an exemption face higher penalties in 2015. The flat-fee penalty would be $325 per person for the year in 2015 or $162.50 per child under 18. The maximum penalty per family using this method is $975 in 2015. Or someone could face a penalty based on roughly 2% of yearly household income in 2015, but only the amount above the tax filing threshold is used to calculate that penalty.
Excerpts from Susan Tompor is also a columnist for the Detroit Fre Press.