The good Affordable Care Act news is that 6.7 million people got health insurance through the Obamacare exchanges in 2014.
The bad Affordable Care Act news is that millions who got a government subsidy to help pay for that coverage could face unwelcome tax surprises at filing time.
Just about everyone will have to do some tax task related to the ACA — even if only checking a box on their Form 1040. For the folks who got coverage through a state or the federal marketplace, there will be new tax reporting documents to hang on to, extra work sheets and forms to fill out and, in some cases, smaller refunds or larger tax bills to pay.
Premium tax credit based on income
The Affordable Care Act, referred to as the ACA or Obamacare, took full effect in 2014. Among the health care law’s many new provisions is the premium tax credit.
“The ACA is rife with dual names,” says Ben Tallman, an enrolled agent and principal at Tallman’s Tax Service in Atlanta. “Premium tax credit is the official name, but you also hear it referred to as the health care assistance credit or health care subsidy. They’re all the same.”
Whatever you call it, the financial aid is available to eligible individuals to help offset the cost of ACA-mandated insurance bought through health care exchanges. The credit is based on the type of health insurance you choose and your estimated annual household income.
Premium tax credit amounts, or subsidies, are based on income. In most states, anyone making under 400 percent of the federal poverty level can get some type of subsidy. The income levels in the chart below reflect the highest amounts that individuals and families could earn to be eligible for a premium credit in 2014.
Who’s eligible for an ACA premium tax credit?
Based on 2013 Poverty Guidelines
|Number of persons in family||48 contiguous states and Washington, D.C.||Alaska||Hawaii|
Source: Congressional Research Service
Individuals who qualify for the financial assistance can receive the credit in advance, with the subsidy payment going to their insurance company to lower out-of-pocket costs for monthly premiums. Or, they can wait until they file their annual returns to claim the full credit.
The Department of Health and Human Services reports that 85 percent of those who bought 2014 policies via the marketplace were eligible for financial assistance. And while HHS didn’t tally how many got the premium tax credit at the time of policy purchase, it’s a safe bet that millions did.
“Most get the credit in advance,” says Tallman. “That’s why it was created, to help with the purchase.”
Some premium tax credit recipients, however, might discover at tax-filing time that the credit amount they received upfront isn’t quite correct. “People tend to exaggerate their situation,” says Tallman. “They get a little overzealous to get the maximum premium credit back. If they lowballed income, they could find they no longer deserve it all.”
Life changes mean premium credit changes
There also is the issue of changed circumstances. The amount of credit you received upon buying an ACA marketplace policy was correct at that time. A few months later, however, you got a raise, and that income increase means you get less of a subsidy.
If you didn’t alert the exchange of your new earnings or other life changes (for example, divorce, child birth or adoption, a move, or loss of a dependent), you’ll pay for any applicable premium amount differences when you file your return.
Cindy Hockenberry, research supervisor at the National Association of Tax Professionals in Appleton, Wisconsin, says the ACA and the premium tax credit are going to force many people to think for the first time about how taxes directly affect their lives.
“They will be asked about changes in circumstances that they never really had to concern themselves with before,” says Hockenberry. “Yes, getting married or having a baby does affect your taxes, but you never had to report that change to anyone. However, if you got an advanced premium credit and don’t account for the change, you now may not be eligible.”
New form, filing considerations
The IRS will confirm that you’re still eligible or make sure you pay back any excess premium, thanks to new reporting and filing forms.
Individuals who bought a policy from an exchange will get a Form 1095-A from that health insurance marketplace by Jan. 31.
“It’s like a W-2 from an employer or 1099-INT for bank interest,” says Tallman. “It’s a new form we’re going to get used to.”
The key here is to be on the lookout for this new tax document. When it arrives, place it with your other important filing material so it will be handy when you do file.
You’ll use the 1095-A data to fill out Form 8962. This new form will help you, your tax professional or your tax software determine whether you got too little, too much or just the right amount of an advanced premium tax credit. Form 8962 also can be used if you didn’t get an advanced premium tax credit but want to claim it when you file your Form 1040.
And speaking of 1040s, although there are three versions, if you’re used to filing the easiest version, Form 1040EZ, you’ll have to familiarize yourself with a new tax return. The premium tax credit, both advance repayment amounts and claims for the credit, must be reported on either Form 1040A or the long 1040.
If you end up repaying all or some of the advanced premium tax credit you received, that reconciliation will either be an addition to any tax you owe or a reduction of any refund you were expecting.
The good news here is that the ACA sets caps on how much of excess premium tax credit a recipient must repay. The maximums are $1,250 for single taxpayers and $2,500 for households. But even with premium tax repayment limits, any amount of unexpected tax due or a smaller refund is going to be a major financial shock at tax-filing time.
Some premium-tax credit recipients will have to learn to live with that shock this filing season.
“You can’t get more than you deserve with the advanced premium without it having a negative effect when the true figures come in,” says Tallman. “You have to pay the difference at tax filing.
“You can’t run. You can’t hide. You’re going to have to deal with it.”