Understand the Tax Implications of the Affordable Care Act Before You Fill Out Your Tax Return

By Richard A. McGrath, CIC, LIA

Much attention has been paid to the Affordable Care Act (ACA), aka Obamacare, but little has been written about the new tax forms resulting from the law, even though every taxpayer in America will be affected.

The ACA ran to more than 2,000 pages and has thus far produced new regulations that are much longer. Many of the new regulations are tax related, so it’s no wonder the new law has many tax complications.

Perhaps of primary importance, the ACA requirement that all Americans obtain health coverage or pay a penalty will be enforced for the first time this year. As part of the enforcement process, taxpayers will be required to indicate on their 2014 tax returns whether they were covered by health insurance for the full year.

If you were uninsured for some or all of 2014, you may have to pay a penalty when you file your tax return. The penalty is 1 percent of your household income above the tax-filing threshold or a minimum of $95 per person. Taxpayers who were uninsured for part of 2014 may be eligible for exemptions from the penalty, but they will have to determine which of the dozens of exemptions they qualify for.

The federal government’s HealthCare.gov site lists the following as being among the circumstances under which an exemption may apply:

  • You’re uninsured for less than three months of the year.
  • The lowest-priced coverage available to you would cost more than 8 percent of your household income.
  • You don’t have to file a tax return because your income is too low.
  • You’re a member of a federally recognized tribe or eligible for services through an Indian Health Services provider.
  • You’re a member of a recognized healthcare-sharing ministry.
  • You’re a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare.
  • You’re incarcerated (either detained or jailed), and are not being held pending disposition of charges.
  • You’re not lawfully present in the U.S.
  • You qualify for a hardship exemption. Healthcare.gov lists 14 potential circumstances for a hardship exemption, including being homeless, filing for bankruptcy within the past six months, being a victim of domestic violence or experiencing “another hardship in obtaining health insurance.”

Some exemptions can be claimed on your tax return, such as if you were without insurance for less than three months or the costs exceed 8 percent of your income. In other cases, such as the recent death of a family member or high medical expenses, you will need to fill out a form claiming a hardship exemption.

Form OMB No. 0938-1190, which is available on HealthCare.gov, should be completed by anyone who wants to file for a hardship exemption. When you file the form, if your exemption is approved, you will receive an exemption certificate number to enter on your tax return. However, it may take weeks to receive the number.

Form 8965 should be used to list all exemptions and certificate numbers. The completed form should be attached to your tax return.

Other ACA-Related Tax Forms

Taxpayers should also be aware of other new tax forms created for various ACA-related purposes, including the following:

Form 1095-A. If your health insurance costs were subsidized through the ACA in 2014, you should have received Form 1095-A in the mail by now. Form 1095-A shows the amount of premium tax credits paid to the insurer on your behalf, based on your estimated 2014 household income and family size.

You will need this form to record the tax credits you received on your 2014 tax return, so if you don’t have it, log on to the Massachusetts Health Connector at betterhealthconnector.com (or whatever site is appropriate for your state, if you are not a Massachusetts resident) and search for an electronic version.

If you were fully covered for all of 2014 and didn’t receive a form in the mail, check the box on your tax return indicating your coverage.

Form 8962. Based on the modified adjusted gross income reported on your 2014 tax return and your family size as of the end of the year, you need to determine the amount of premium tax credit for which you were eligible. That amount is calculated using Form 8962, which must be filed with your tax return.

If your actual income was lower than you had estimated, you can receive the remainder of the tax credit as a tax refund. If the credit you received was too high, you may have to repay some or all of the excess.

Unanticipated life changes during 2014, such as a divorce, the birth of a child or a return to the workforce, could result in significant adjustments to the subsidy to which you are entitled. For an individual earning adjusted gross income of up to $46,680, or 400 percent of the federal poverty level, there are caps on the required repayment.

If your income is higher than that amount, you may have to pay it back. However, you can reduce your adjusted gross income by contributing to a traditional IRA. The deadline for contributing is April 15 and all income contributed up to $5,500 ($6,500 if you are 50 or older) is deducted from adjusted gross income for tax purposes.

Form 1095-B, which may be sent to you by your health insurer, will identify individuals in your household who were covered and the months during which they were covered. You and other family members will be considered fully covered for any month during which you had coverage for even a single day.

Form 1095-C, which will be sent to you if you work for a large employer, will indicate whether your employer offered coverage and the employee share of the monthly premium for the employer’s lowest-cost plan.

If you declined coverage from your employer because it was too expensive and instead purchased health insurance through the Massachusetts Health Connector, this form will help you determine and document whether you were eligible for tax credits to help cover the cost of premiums. If the employee share of your employer’s lowest-cost plan is more than 9.5 percent of your 2014 income, you can claim premium tax credits for 2014.

Forms 1095-B and 1095-C are not mandatory for the 2014 tax year, so some taxpayers who were covered in 2014 will receive them and others will not.

How do you document your coverage if you didn’t receive the proper forms? Check with your employer or with the Massachusetts Health Connector to ensure that you have all the necessary paperwork.

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at rmcgrath@mcgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.