Tax News, Journals and Newsletters > Federal Tax > Federal Tax Day – Current > INTERNAL REVENUE SERVICE > I.4, IRS Official Discusses the Provisions of the Affordable Care Act Affecting Individuals During the 2014 Filing Season, (Jan. 29, 2015)
In preparation for the 2014 filing season, William Smits, IRS senior manager, Wage & Investment Division, and the national ACA outreach coordinator for individual tax provisions, provided a detailed overview of the reporting requirements under the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) that affect individuals this year. During a January 28 webcast hosted by the AICPA, entitled, “ACA Provisions to Know for 2014 Individual Returns,” Smits in particular covered how individuals should report their minimum essential coverage or lack thereof on their tax returns, and how Form 8965, Health Coverage Exemptions, and Form 8962, Premium Tax Credit, fit into the equation.
Beginning for the 2014 tax year, most U.S. citizen and resident alien individuals are required to either obtain minimum essential coverage (MEC) for every month in the year or to have an exemption. If the individual does not either obtain MEC for the full year or an exemption from the requirement to obtain MEC for the months for which he or she was not covered, that individual must make a shared responsibility payment along with his or her federal tax return.
“Every individual must address the MEC requirement on his or her 2014 return,” Smits explained. If a taxpayer obtained MEC for the full year, the taxpayer may simply check a box on the tax return indicating this. For example, Smits said, if a single taxpayer received employer-provided coverage through her employer for the full year, and this coverage qualified as MEC, on her Form 1040, U.S. Individual Income Tax Return, she would simply check the box on line 61 to indicate she had full-year coverage.
- The corresponding box on Form 1040A is found on Line 38; for Form 1040EZ, it is on Line 11.
- Smits noted that return preparers were expected to exercise the regular level of due diligence when reporting MEC, exemptions and/or information related to a claim for a Premium Tax Credit. “The normal diligence requirements apply, meaning that there is no special or formal due diligence requirement,” he said. “You can accept oral statements from the taxpayer. Obviously taxpayers are responsible for the accuracy of the information on their returns.”
Reporting Exemptions from MEC
If an individual did not obtain MEC for the full-year, but qualified for an exemption, that individual must report and/or claim the exemption by filing Form 8965 along with his or her tax return. Different types of exemptions must be obtained in different ways. Some, for example, may only be obtained by applying to the Health Insurance Marketplace. These, once obtained, may be reported on Part I of Form 8965, Smits said.
Part II of Form 8965 contains two check boxes on Lines 7a and 7b. The first box is used to claim the IRS-granted exemption from MEC for taxpayers with household income below the filing threshold. The second is used to claim a hardship exemption. In other words, the MEC requirement and, therefore, the individual shared responsibility payment, will not apply if the individual has suffered a hardship (as defined by the Secretary of Health and Human Services (HHS)) with respect to the ability to obtain coverage under a qualified health plan for the month.
“These exemptions apply to the entire tax household,” Smits said. “If you’re able to check yes to 7a or 7b, that applies to everyone in the household for the entire year, and there’s no need to complete Part I or III for the entire year.”
Part III of Form 8965 is used to claim other exemptions that may be claimed through the IRS. Individuals enter the code corresponding to their exemption (found in the Form 8965 Instructions) in column c. A taxpayer will check column d if the exemption applies for the full year. “If the exemption is only for certain months, you’d check the columns for the 12 months accordingly,” Smits explained.
Individual Shared Responsibility
If an individual did not obtain MEC for the full year and did not qualify for an exemption, the individual must calculate his or her individual shared responsibility payment and report the amount on Form 1040, Line 61 (or on the corresponding lines on Forms 1040A and 1040EZ).
The individual shared responsibility payment is the greater of:
- 1. A flat-dollar amount, capped at the cost of a bronze-level plan premium for the region in which the taxpayer lives; or
- 2. A specified percentage of the taxpayer’s household income.
- “Taxpayers have to know their household income and their return filing threshold to calculate their responsibility,” Smits said. Household income, unlike gross income reported on the return, includes income from dependents who have income above the filing threshold and who were required to file a federal tax return for the year, he explained. Household income, however, is not reported on the individual’s return. Worksheets are available in the instructions, but they are not attached to the tax return when it is submitted.
For 2014, the flat-dollar amount is $95 per adult for the entire year. The amount for a child under age 18 would be half that amount, or $47.50. For 2015, this amount will increase to $325 per adult and $162.50 per child. The maximum flat-dollar amount is capped at three times $95 for 2014.
The specified percentage of a taxpayer’s household income for 2014 is 1 percent. For 2015, this will increase to 2 percent.
“The simplest way to calculate the individual shared responsibility payment is to compare a taxpayer’s percentage of income to the flat dollar amount. The payment is the greatest amount,” Smits said.
A single taxpayer named “Jim” has $40,000 in household income for 2014, does not obtain MEC and does not qualify for an exemption for any month of the year; therefore, he must calculate the individual shared responsibility payment. He would do so by:
- Subtracting the filing threshold amount (the amount of income, below which, a taxpayer is not required to file a return) from his household income. For 2014, the filing threshold is $10,150, so his household income for shared responsibility payment purposes would be $40,000 – $10,150 or $29,850.
- Calculating the payment using the percentage method: $29,850 x 1% = $298.50.
- Comparing the payment calculated using the percentage method with the flat-dollar amount. Since $298.50 is greater than $95, “Jim’s” individual shared responsibility payment is $298.50.
“Jim” must then report his $298.50 shared responsibility payment on Line 61 of his 2014 Form 1040.
Smits noted that more examples of how to calculate the payment are available on irs.gov and in the final regulations under Code Sec. 5000A.
Premium Tax Credit Reporting
If an individual obtained MEC by enrolling in a qualified plan offered through the federal or state health insurance Marketplace and also qualified for a premium tax credit, the individual must complete Form 8962 and file it along with his or her 2014 federal tax return. “Form 8962 is used to claim the premium tax credit regardless of whether the taxpayer received advanced payments or not,” Smits stressed. He added that a taxpayer could not claim a premium tax credit on a Form 1040EZ.
A taxpayer filing a Form 1040 will complete Form 8962 and claim a Premium Tax Credit on Line 69 of Form 1040 (or Line 45 on Form 1040A or Line 65 of Form 1040NR). If a taxpayer received an advanced premium tax credit payment, meaning that at the time of enrollment, the taxpayer elected to have the tax credit (based on his or her projected income for the year of coverage) directly advanced to his or her insurer, the taxpayer must calculate the actual amount of the premium tax credit he was entitled to receive during the year. Then the taxpayer must use Part III of Form 8962 to reconcile the advance payment with the actual amount. If the taxpayer’s advance payment exceeded the actual amount to which he or she was entitled for the year, the taxpayer must report the difference. The taxpayer must then repay some or all of the advance payment.
- Smits added that Form 8962, Part IV, covers shared policy applications, meaning when a Marketplace plan covers individuals spread out through more than one tax return. Form 8962, Part V, applies to an alternative calculation for marriage. “The IRS will be issuing Publication 974 in the near future, which will also provide more detail on Parts IV and V.”
Federal Poverty Level and Eligibility
Eligibility for the Premium Tax Credit is based in part on a taxpayer’s household income as it compares to the federal poverty level (FPL). A taxpayer is eligible for the Premium Tax Credit if his or her family income is between 100 and 400 percent of the FPL (and the taxpayer meets all the other requirements for the premium tax credit). For 2014, eligibility for open enrollment was based off of the 2013 FPL tables, Smits explained. That means the 2013 tables will be used for calculating the premium tax credit on 2014 tax returns. Similarly, open enrollment for coverage in 2015 was based on the 2014 FPL data. “We’re always using the prior year FPL data,” Smits explained.
By Jennifer Cordaro, Wolters Kluwer News Staff