What is catching so many people off guard this tax season?
While it's still early in the tax season, I've found that more taxpayers than I expected are shocked when they find out they owe far more taxes than they were expecting or surprised to find a much larger refund due to the new tax credits and penalties tied to the Affordable Care Act. Some people will find that they are required to pay back some of their healthcare subsidies.
Who will need to pay back their healthcare subsidies?
Individuals who purchased health insurance through the Marketplace (Covered California / Healthcare.gov) were required to provide an estimate of their expected income for 2014. Based on the amount of income that individual expected to earn, they may have received something called the Premium Tax Credit to help with the cost of insurance. In most cases this tax credit would be pre-paid directly to the healthcare provider on behalf of the individual.
What happens if that individual wound up earning more or less than they had estimated at the start of the year? Well, if you happened to earn more than you estimated(got a raise, bonus, worked more hours, withdrew money from a retirement plan etc.) you may be required to pay back a portion of the tax credit paid to the healthcare provider on your behalf when you file your tax return. Using similar rationale, if a taxpayer earned less than what they had estimated, that taxpayer may be entitled to a larger Premium Tax Credit which would be applied to any tax liability or paid out as a tax refund.
To determine if you must pay back some of the Premium Tax Credit paid on your behalf or determine if you should receive a larger Premium Tax Credit, you must reconcile your income, the amount of Premium Tax Credit already received, and the amount of Premium Tax Credit you should have received. In order to assist with this task, the IRS has developed a new information form titled 1095-A. If you purchased insurance through the Marketplace, you will receive this new form in a similar manner to the way W-2's and other tax documents are received. Individuals who purchased insurance through the Marketplace are required to have form 1095-A in order to file their tax returns. If you do not receive one, you should contact the Marketplace.
Will I need to pay a penalty for not having coverage?
Most people without insurance will have to pay a penalty. You may be eligible to claim an exemption from the penalty under certain situations that you can report at the time you file your taxes or you may have been given an exemption through the Marketplace by applying for one and receiving an exemption certificate number(ECN). The penalty for 2014 taxes is the greater of $95 per adult plus $47.50 per dependent child or 1% of your income. For 2015 the penalties increase to $325 per adult and $162.50 per child. To avoid a penalty for 2015, you may enroll in healthcare through the marketplace through February 15, 2015.
These new tax forms may have a big impact when you file you taxes this year.