ACA and Tax Filing

While everyone was talking about last year being the year everyone finally felt the impacts of the Affordable Care Act (ACA) with the roll out of the federal and state exchanges, for CPAs and anyone filing a tax return, the 2014 tax returns filed in 2015 will be the year of even greater impacts. That is because this is the first year people’s tax returns include requirements under the ACA. There are two big requirements; one affects everyone and the other impacts anyone buying insurance on the exchanges.

The new requirement that impacts everyone is that you have to report if you had qualifying health insurance, otherwise you have to pay a penalty. If you had insurance, the requirement will be as easy as checking a box (unless you are audited). On the other hand, those who didn’t have insurance have some work ahead of them. Unfortunately, many taxpayers have also been misinformed. They are under the impression that those without insurance will be charged a penalty of $95. First off, the penalty is $95 per member of the household (with a cap of 3). That means for anyone without insurance and at least two dependents, the minimum penalty is $285. But, it gets worse. For 2014, the penalty per person is the greater of $95 or 1% of taxable income. For a middle class family with taxable income of $40,000 that means the penalty per person is $400, not $95 and for a taxpayer with 3 or more members of the household that means the penalty is $1,200 not $285. This means there are going to be people who thought it was cheaper to not buy insurance that will be getting a much smaller refund or even making an additional tax payment come March and April.

By the way, the penalty increases in 2015 to $325 or 2% per person. This means that same family making $40,000 will pay a penalty of $2,400 next year (because it is greater than the $975 of the minimum for 3 people). The percentage of taxable income is really much more important in determining the penalty than the listed dollar minimums. However that doesn’t make for an easy sound bite, so most people don’t realize the penalty is really based on a percentage of net income.

The second new requirement is for those who obtained insurance through the exchanges, they must reconcile the tax credits they got to reduce the cost of insurance to the actual tax credits they were due. When the insurance buyer input their information to determine the credits they could obtain, he/she had to estimate their income, marital status and dependents for 2014. The actual amounts for these items is likely to be different from the estimates provided. If the person ended up with less income, then they will be due additional credits. More likely, the person will have earned more than their estimate and will end up owing back to the government a portion of the credits they received. The big problem is the group of people having to make these computations is the same group that can’t seem to properly compute the earned income tax credit (EITC). Last year 24% of the EITC paid was in error. I don’t have high hopes that the computation of the ACA credits will be any better.

At least the news stories covering the 2015 tax filing season may be a little more interesting this year.

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