As we move into 2015, the tax implications of the Affordable Care Act (ACA) are becoming a reality for most individuals. The purpose of this article is a discussion of the changes that will affect individual tax filers due to the Individual Shared Responsibility provisions attached to the ACA. The focus will be on the basic requirements of the provisions and new tax rules for the 2014 tax year and beyond.
The Individual Shared Responsibility Provisions
Beginning in January 2014, nonexempt individuals were required to maintain minimum essential coverage health insurance for themselves and their dependents for each month during the taxable year. In order to meet this requirement, an individual must be enrolled in and entitled to receive benefits that include minimum essential coverage for at least one day in the month.
Individuals have several options for obtaining health insurance meeting the minimum essential coverage requirements including:
- Health insurance provided by employer
- Coverage provided by a government-sponsored program (Medicare, Medicaid, Tricare)
- Health insurance purchased directly from an insurance company
- Health insurance purchased through the state or federal exchange
Minimum Essential Coverage
In order to qualify as minimum essential coverage, a plan must include items and services within at least these categories:
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Ambulatory patient services
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Hospitalization
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Emergency services
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Prescription drugs
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Maternity and newborn care
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Rehabilitative services and devices
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Mental health and substance abuse disorder services, including behavioral health treatment
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Laboratory services
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Pediatric services, including oral and vision care
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Preventive and wellness services and chronic disease management
Health Insurance Premium Assistance Refundable Credit
To help subsidize the cost of health insurance, a premium assistance credit is available. This is a refundable tax credit available to an “applicable taxpayer” for any month that one or more members of the taxpayer’s family are enrolled in qualified health insurance through a state exchange, AND not eligible for coverage through another source such as employer or government coverage.
The credit can be determined in advance by making a request to an Exchange. In that case, Treasury can make direct payments of the credits to health plan insurers. However, individuals may elect to purchase insurance without taking the credits at time of purchase and then apply to the IRS for the credit at the end of the tax year.
Exemptions from Requirement for Health Coverage
Some individuals may be exempt from the requirement to maintain minimum health coverage. These include:
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Members of a health care sharing ministry
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Members of certain religious sects
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Incarcerated individuals
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Native Americans
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Household income below the tax return filing threshold
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Individuals uninsured for a period less than 3 months during a tax year
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Individuals whose premiums would exceed 8% of household income
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Exempt noncitizens
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Individuals suffering a hardship that makes them unable to obtain coverage
For further explanation of the exemptions, please follow this link:
Payments Required for Noncompliance with the Individual Shared Responsibility Provisions
For 2014, the annual payment amount is the GREATER of 1% of household income that is above the tax return filing threshold for the taxpayer’s filing status, OR a family’s flat dollar amount. The flat dollar amount is $95 per adult and $47.50 per child, limited to a family maximum of $285 for 2014. The shared responsibility payments are phased in. For 2015, the payment is the greater of 2% of household income, or $325 per adult. For 2016, the payment is the greater of 2.5% of household income, or $695 per adult.
For purposes of the individual shared responsibility payment, household income is defined as the sum of modified adjusted gross income (MAGI), plus the aggregate MAGI of all other individuals taken into account in determining the taxpayer’s family size.
Example: In 2014, the Smiths, a couple with no children, file a return as married filing jointly. They have household income of $150,000. The Smiths are both uninsured for the entire year of 2014. What is the Smiths’ shared responsibility payment?
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Flat Dollar Penalty: $95 * 2 adults = $190
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Percentage of Income Penalty: $150,000 – 20,300 (tax return filing threshold) = 129,700
- $129,700 *1%=$1,297
The penalty is the greater of the flat dollar penalty or the percentage of income penalty, so in this case it would be $1,297.
New Tax Forms and Reporting Required for Individual Shared Responsibility Provisions
Individuals will need to complete some new tax forms to include with their 2014 return. IRS Form 8962 will be used to compute Premium Tax Credits for individuals. This form should be filed by you if you are an individual taking the premium tax credit, or if advance payment of the premium tax credit was paid for you or anyone in your tax family. In addition, Form 8965 will be filed by you if you want to claim a coverage exemption for yourself or another member of your tax household. Form 1040 will also require new entries on line 46, Excess Advance Premium Tax Credit Repayment, line 61, Tax Owed for Individual Shared Responsibility Payment, and line 69, Net Premium Tax Credit.
For Draft 2014 Form 1040, please follow this link:
For 2014 Form 8962, please follow this link:
For 2014 Form 8965, please follow this link:
Conclusion
Individual taxpayers filing 2014 tax returns in the year 2015 will be affected by the ACA Individual Shared Responsibility provisions. If you do not meet the requirements of the Individual Shared Responsibility provisions, you will be required to make a payment for noncompliance. Keep in mind that the payment amounts will increase for tax years 2015 and after, so it would be in the best interest of most individuals to comply with these provisions to avoid penalties in future tax years.
We are always happy to discuss your individual tax situation with you and help you better understand these new provisions. You may contact us at (719) 630-1186 or through our Secure Email.
