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.

What are the impacts of the ACA?

The next question I received could take me years of blogs to explain, which makes sense since it is about a piece of legislation that is longer than the novel War and Peace. The question is “what are the impacts of the Affordable Care Act?” There are hundreds of impacts, but I am going to focus on two; one that affects individuals and is very misunderstood and one that affects companies and is not really discussed.

The individual mandate to buy insurance is well known, but the tax (that is what the Supreme Court said it was and who am I to argue) for not buying insurance is very misunderstood. The press and talk shows focus on the minimum payment for not buying insurance. In 2014 that will be $95. In 2015 it increases to over $325. The problem is that is where most people stop talking, but that is not what the law says. The law says that the minimum tax for not buying insurance in 2014 is the greater of $95 or 1% of an individual’s AGI. As most CPAs are good at math I assume you can easily figure out that once an individual’s AGI exceeds $9,500, they will no longer be paying $95, but instead 1% of their AGI. Most people who file and pay taxes make significantly more than $9,500. Looking at an income of $35,000 which is around the average reported, the tax would be $350. Those who want to argue that $95 is not enough of a tax to get people to pay several hundred dollars a month in premiums can probably make the same point with a $350 payment, but that is not the point. The point is that there are a lot of people out there that have not bought insurance and are thinking they will just have to pay (or receive a reduced refund of) $95 who will be negatively surprised when the bill is a lot higher next April 15. And the percentage doubles in 2015 to 2% which drives that tax to $700. People will be feeling that tax hit just as the presidential primaries are getting into full swing in 2016. That will make for some interesting political discussions.

The impact to companies is being felt by employees all over the country right now, but they may not have realized it. All self-insured companies have to pay a $63 per “covered life” (if the company covers their employee, spouse and 2 children, they have to pay 4*$63 or $252). The fee is called the “transitional reinsurance fee” and is over $5 per month per covered life. So if you are single and your monthly contributions went up this year, $5 of that increase is going straight to the government as a stealth tax on you. If you cover your family of 4 then it is over $20 a month. If you are thinking, well only big companies are self-insured and they can afford it, you are wrong; not on the “afford it” part which can be debated, but because all insurance companies must pay the fee too. If you think the insurance companies will just eat the cost you don’t understand how they work. Insurance companies raised their premium rates to cover the fee, so that increase in your contributions driven by higher insurance premiums is, at least in part, going straight to the government. The problem is this fee really hasn’t been talked about so everyone just assumes it is the big companies and insurers sticking it to the little guy when it is really your friend and ally, the Federal government.

That is all I have space to talk about for now, but if there is a specific part of the Affordable Care Act you would like me to discuss, just send your question into Ask Bill and I will try to address it.