FEDERAL INCOME TAX IMPLICATONS OF THE ACA MANDATE FOR INDIVIDUAL TAXPAYERS Starting in 2014, the Patient Protection and Affordable Care Act (ACA) mandates that individuals carry minimum essential health insurance coverage (as defined by the federal government). As a result of the ACA mandate, individual taxpayers need to be aware of two possible tax implications when filing their 2014 tax returns. First, taxpayers who fail to comply with the mandate are subject to a penalty that they report on their tax returns. This penalty increases the amount of taxes they will owe, or reduces their tax refund. Second, taxpayers who comply with the mandate by obtaining insurance through the government Marketplace may qualify for a refundable tax credit. This supplement to the 2015 Edition of Essentials for Federal Income Taxation helps explain the tax implications of the new ACA mandate as it applies to the penalty assessed and tax credit available to individual taxpayers in 2014. TAX PENALTY FOR FAILING TO COMPLY Taxpayers who fail to comply with the ACA mandate to carry minimum health insurance coverage face a penalty that they report on their tax returns. The penalty is reported on the line designated, Health care: individual responsibility on Form 1040EZ, Form 1040A, or Form 1040. For 2014, the penalty is the greater of (i) $95 for each uninsured adult plus $47.50 for each uninsured child under the age of 18, as reported on the taxpayer s tax return (up to a maximum of $285), or (ii) 1% of household income over the taxpayer s filing threshold. EXAMPLE 1 Paul and Jean Hunt (ages 44 and 42, respectively) file a joint return and claim their son as a dependent. The Hunts fail to comply with the ACA mandate for 2014. Their household income is $75,000; their filing threshold is $20,300 (see Figure 1-5, 113.02). The Hunts penalty for failing to comply with the ACA mandate in 2014 is $547, which is the greater of (i) $237.50 ($95 2 adults + $47.50 for 1 child) or (ii) $547 (1% ($75,000 $20,300)). PREMIUM TAX CREDIT Taxpayers who comply with the ACA mandate by obtaining their insurance through the government s health insurance Marketplace may be eligible for federal government assistance to subsidize (help pay for) a portion of their premiums. For some taxpayers, this subsidy may be in the form of reduced monthly payments. For others, this assistance comes in the form of a refundable tax credit.
1 2 Essentials of Federal Income Taxation The amount of the premium reduction (advance subsidy) is based on household income and family size reported by the taxpayer at the time of enrollment. Since the taxpayer s actual household income for the year will likely differ from the self-reported amount provided at the time of enrollment, taxpayers who receive assistance during the year need to reconcile their advanced subsidies (total premium reduction) with the amounts to which they were entitled based on actual household income. Taxpayers whose actual subsidies they received during the year were greater than their entitled assistance must repay the excess by reporting additional tax on their tax returns. Taxpayers who did not receive the assistance they were entitled to during the year claim a refundable tax credit for the difference. Taxpayers Who Qualify for the Premium Tax Credit (PTC) Only taxpayers whose household income is at least 100%, but no more than 400%, of the federal poverty line can claim the refundable premium tax credit (PTC). Taxpayers who qualify for Medicare or Medicaid, or who are eligible to get insurance under an employer-sponsored plan, self-funded student health plan, or through high-risk pools offered by the state government, cannot claim the PTC. Married taxpayers must file a joint tax return in order to claim the PTC; and taxpayers claimed as a dependent on another person s return are not eligible for this credit. Computing the PTC Using the taxpayer s total household income and family size, the government determines the maximum amount each taxpayer should have to pay for health insurance. The term the IRS uses to describe this amount is annual contribution for health care. The government also determines what the taxpayer s annual premiums would be for its silver plan (the second lowest cost plan offered by the Marketplace). The taxpayer s PTC is the lesser of (i) the taxpayer s actual premiums (prior to any subsidy), or (ii) the difference between the cost of the silver plan and the taxpayer s annual contribution for health care. Form 1095-A, Health Insurance Marketplace Statement, is an information return sent out to Marketplace participants after the end of each year. This form informs participants of the cost of the premiums (prior to any subsidies) for the policy in which they enrolled, as well as the cost of the premiums for the silver plan, which is the second lowest cost plan the Marketplace offers. A blank Form 1095-A has been included at the end of this supplement. EXAMPLE 2 Duke Smith purchases his insurance through the federal Marketplace. Duke selects a bronze plan, which is the least costly of the four types of plans offered by the Marketplace. Total annual premiums for his plan are $3,000. Had Duke selected the silver plan, his premiums would have been $5,600. Based on Duke s household income and family size, the government has determined that Duke s annual contribution for health care is $1,700. Duke s PTC is $3,000, which is the lesser of (i) $3,000 total premiums for the plan Duke enrolled in, or (ii) $3,900 ($5,600 premiums under the silver plan $1,700 annual contribution for health care). EXAMPLE 3 Same facts as in Example 2, except that Duke selects a platinum (most expensive) plan, and his premiums are $8,000. Duke s PTC is $3,900, which is the lesser of (i) $8,000, or (ii) $3,900 ($5,600 $1,700).
Federal Income Tax Implicatons of the ACA Mandate for Individual Taxpayers 1 3 From looking at how the PTC is calculated, the government has concluded that every individual is entitled to receive the benefits offered by the Marketplace s silver plan. For taxpayers whom the government does not believe have enough household income to pay for these benefits (based on the ratio of household income to the federal poverty line), it is willing to provide assistance up to the difference between the silver plan premiums and the taxpayer s annual contribution limit (as shown in Example 3). Taxpayers who decide to go with a less expensive (bronze) plan will find their PTC limited to the cost of premiums under that plan (as shown in Example 2). The taxpayer s annual contribution for health care represents what the government has determined should be the maximum amount that the taxpayer should have to pay for health insurance premiums. It is based on total household income and the number of exemptions the taxpayer claims. Household income is the sum of the taxpayer s modified AGI and the modified AGI of each of the taxpayer s dependents. For purposes of the PTC, modified AGI is AGI plus any tax-exempt interest income ( 401.06), nontaxable social security benefits ( 307), and foreign earned income exclusion ( 401.02). EXAMPLE 4 Jim and Cathy Thompson live in Missouri. They file a joint tax return and claim their three children as dependents. The Thompsons are not eligible for health insurance through their work, so they purchase their insurance through the Marketplace. On their joint tax return, the Thompsons report $500 of tax-exempt interest income and $52,000 of AGI. The Thompsons son earned $2,000 working part-time during the year. The Thompsons household income equals $54,500. This amount is the sum of the couples $52,500 of modified AGI ($52,000 + $500) and their dependent child s $2,000 of modified AGI. Once the taxpayer s household income has been computed, the taxpayer uses an IRS-provided table to find the federal poverty line that corresponds to the total number of (personal and dependency) exemptions the taxpayer claimed. The table that provides poverty lines for most taxpayers is shown below in Table 1. There are separate tables that are used by taxpayers living in Alaska and Hawaii. Each of these tables can be found in the Instructions to Form 8962. Table 1 Federal Poverty Line for the 48 Contiguous States and the District of Columbia Total Exemptions Claimed Federal Poverty Line 1 $11,490 2 15,510 3 19,530 4 23,550 5 27,570 6 31,590 7 35,610 8 39,630 EXAMPLE 5 Continuing with Example 4, the Thompsons use Table 1 to look up the federal poverty amount for taxpayers claiming five exemptions. This amount is $27,570. The next step in the process of determining the taxpayer s annual contribution for health care is to divide household income by the federal poverty line. Only taxpayers whose household income falls between 100% and 400% of the federal poverty line qualify for the PTC. EXAMPLE 6 Continuing with Example 5, the Thompsons divide their $54,500 of household income by $27,570 (their federal poverty line). The 1.98 result means that the Thompsons household income is 198% above the federal poverty line. Because this percentage falls between 100% and 400%, the Thompsons qualify for the PTC.
1 4 Essentials of Federal Income Taxation Once it has been determine that the taxpayer qualifies for the PTC, the taxpayer s annual contribution for health care can be computed. This is done by multiplying the taxpayer s household income by the applicable figure from Table 2 (found in the Instructions to Form 8962). The applicable figure is the number in Table 2 that corresponds to the percentage previous calculated (household income divided by the federal poverty line). Table 2 from the instructions to Form 8962 can be found at the end of this supplement. EXAMPLE 7 Continuing with Example 6, the Thompsons go to Table 2 and find that the applicable figure for 198 is.0621. They multiply this number by their $54,500 of household income to arrive at their annual contribution for health care ($54,500.0621 = $3,384). This amount represents the maximum amount the government has determined the Thompsons should have to pay for health insurance premiums. After the annual contribution for health care has been computed, taxpayers can use the information reported to them on Form 1095-A to compute their PTC. The taxpayer s PTC is the lesser of (i) the taxpayer s actual premiums (prior to any subsidy), or (ii) the difference between the cost of the silver plan and the taxpayer s annual contribution for health care. EXAMPLE 8 Continuing with Example 7, the Thompsons Form 1095-A shows that their annual premiums for the policy they enrolled in was $7,000, and that their premiums would have been $6,600 had they enrolled in the silver plan. The Thompsons PTC equals $3,216. This is the lesser of (i) the $7,000 cost of premiums for the plan they enrolled in, or (ii) $3,216 (the $6,600 cost for premiums under the silver plan minus their $3,384 annual contribution for health care). For taxpayers who did not receive any premium reductions during the year, the PTC is reported as a refundable tax credit on Form 1040A (line 45) or Form 1040 (line 69). Form 1040EZ cannot be used to report the PTC. Taxpayers receiving premium reductions (advance payment of PTC) need to reconcile the difference between their advance payment and their PTC. Reconciling Advance Payment of PTC and PTC In addition to providing taxpayers with the cost of their insurance premiums under both the plan they enrolled in and the silver plan, Form 1095-A also provides taxpayers with the amount of premium reductions they received during the year. This amount represents their advance payment of PTC. Taxpayers compare their PTC to their advance payment of PTC. If the taxpayer s PTC exceeds their advance payment, the difference ( net PTC ) is reported as a refundable tax credit on Form 1040A (line 45) or Form 1040 (line 69). EXAMPLE 9 June and Jim Rosen compute their PTC to be $4,500. The Rosens Form 1095-A shows that they received advance payments totaling $3,850 during the year. The Rosens reduce their PTC by their advance payments and report the $650 net PTC ($4,500 $3,850) as a refundable tax credit on Form 1040A or Form 1040. Excess Advance PTC Repayment When the taxpayer s advance payment of PTC exceeds their PTC, at least some of the excess must be paid back to the government. This is done by having the taxpayer report an additional tax on Form 1040A (line 29) or Form 1040 (line 46). The amount that must be repaid is the lesser of (i) the excess of the advance payment of PTC over the PTC, or (ii) the amount from Table 3 that corresponds to the taxpayer s filing status. Thus, the amounts in Table 3 serve as a maximum repayment for taxpayers receiving advanced payments.
Federal Income Tax Implicatons of the ACA Mandate for Individual Taxpayers 1 5 Table 3 Repayment Limitations Taxpayer s Household Income as a Percentage of Federal Poverty Line: Taxpayer s Filing Status Single All Others Less than 200% $ 300 $ 600 At least 200% but less than 300% 750 1,500 At least 300% but less than 400% 1,250 2,500 EXAMPLE 10 Continuing with Example 8, assume that the Thompsons Form 1095-A shows that they received $3,600 of advanced payment of PTC. This amount exceeds the Thompsons PTC by $384 ($3,600 $3,216). From Table 3, the amount that corresponds to MFJ taxpayers whose household income as a percentage of the federal poverty line is 198% is $600. Since the $384 of excess does not exceed this amount, the Thompsons report the $384 as an additional tax on their Form 1040A or Form 1040. Form 8962 Form 8962, Premium Tax Credit, is a two-page tax form that calculates the taxpayer s PTC. For taxpayers who received advanced payment of PTC (through reduced premiums), the taxpayer s net PTC (not enough subsidies) or excess advance PTC repayment (too much subsidy) is also calculated on this form. These calculations are performed in Parts 1-3 of Form 8962 (page 1). Parts 4 and 5 involve complex situations that are beyond the scope of this discussion. In Part 1, taxpayers compute their annual contribution for health care. In Part 2, taxpayers report the information provided to them on Form 1095-A and calculate their PTC. Net PTC is also calculated in Part 2. Taxpayers receiving advanced payment of PTC during the year in excess of their PTC compute their required repayment in Part 3. FILLED-IN FORM 8962 The Thompsons (from Examples 4-8, and Example 10) compute their net PTC or repayment amount by entering on the form the information provided below in bold font. The Thompsons then follow the instructions on Form 8962 to compute their $384 excess advance premium tax credit repayment. They report this amount as an additional tax on Form 1040 (line 46). Line # 1 Family size (2 personal + 3 dependency exemptions), 5 2a Modified AGI reported on the Thompsons tax return, $52,500 ($52,000 + $500, provided in Example 4) 2b Modified AGI of the Thompsons dependents, $2,000 (provided in Example 4) 4 Federal poverty line, $27,570 (source: Table 1, see Example 5) 6 The Thompsons check Yes. because the 198% reported on line 5 is less than or equal to 400%. 7 Applicable Figure,.0621 (source: Table 2 from the Instructions to Form 8962, see Example 7) 11A Premium Amount, $7,000 (source: Form 1095-A, line 33A. This is the total cost of the premiums (before subsidies) of the insurance plan the Thompsons enrolled in). 11B Annual Premium Amount of SLCSP, $6,600 (source: Form 1095-A, line 33B. This is the total cost of the premiums for the second lowest cost silver plan). 11F Annual Advance Payment of PTC, $3,600 (source: Form 1095-A, line 33C. This is the amount of the Thompsons health care premiums that the government paid on their behalf.)
1 6 Essentials of Federal Income Taxation Form 8962 Department of the Treasury Internal Revenue Service Name shown on your return Premium Tax Credit (PTC) Attach to Form 1040, 1040A, or 1040NR. Information about Form 8962 and its separate instructions is at www.irs.gov/form8962. Your social security number James and Cathy Thompson 859-76-4466 Part 1: Annual and Monthly Contribution Amount 1 Family Size: Enter the number of exemptions from Form 1040 or Form 1040A, line 6d, or Form 1040NR, line 7d. 1 OMB No. 1545-0074 2014 Attachment Sequence No. 73 Relief (see instructions) 2 a Modified AGI: Enter your modified b Enter total of your dependents' modified AGI (see instructions)..... 2a 52,500 AGI (see instructions)...... 2b 2,000 3 Household Income: Add the amounts on lines 2a and 2b................. 3 54,500 4 Federal Poverty Line: Enter the federal poverty amount as determined by the family size on line 1 and the federal poverty table for your state of residence during the tax year (see instructions). Check the appropriate box for the federal poverty table used. a Alaska b Hawaii c Other 48 states and DC 4 5 Household Income as a Percentage of Federal Poverty Line: Divide line 3 by line 4. Enter the result rounded to a whole percentage. (For example, for 1.542 enter the result as 154, for 1.549 enter as 155.) (See instructions for special rules.) 5 198 % 6 Is the result entered on line 5 less than or equal to 400%? (See instructions if the result is less than 100%.) Yes. Continue to line 7. No. You are not eligible to receive PTC. If you received advance payment of PTC, see the instructions for how to report your Excess Advance PTC Repayment amount. 7 Applicable Figure: Using your line 5 percentage, locate your applicable figure on the table in the instructions.. 7.0621 8 a Annual Contribution for Health Care: b Monthly Contribution for Health Care: Divide Multiply line 3 by line 7.... 8a 3,384 line 8a by 12. Round to whole dollar amount 8b 282 Part 2: Premium Tax Credit Claim and Reconciliation of Advance Payment of Premium Tax Credit 9 Did you share a policy with another taxpayer or get married during the year and want to use the alternative calculation? (see instructions) Yes. Skip to Part 4, Shared Policy Allocation, or Part 5, Alternative Calculation for Year of Marriage. No. Continue to line 10. 10 Do all Forms 1095-A for your tax household include coverage for January through December with no changes in monthly amounts shown on lines 21 32, columns A and B? Yes. Continue to line 11. Compute your annual PTC. Skip lines 12 23 No. Continue to lines 12 23. Compute and continue to line 24. your monthly PTC and continue to line 24. Annual Calculation 11 Annual Totals Monthly Calculation 12 January 13 February 14 March 15 April 16 May 17 June 18 July 19 August 20 September 21 October 22 November 23 December A. Premium B. Annual Premium C. Annual D. Annual Maximum E. Annual Premium F. Annual Advance Amount (Form(s) Amount of SLCSP Contribution Amount Premium Assistance Tax Credit Allowed Payment of PTC (Form(s) 1095-A, line (Form(s) 1095-A, line 1095-A, line 33A) 33B) (Line 8a) (Subtract C from B) (Smaller of A or D) 33C) 7,000 6,600 3,384 3,216 3,216 3,600 A. Monthly Premium Amount (Form(s) 1095-A, lines 21 32, column A) B. Monthly Premium Amount of SLCSP (Form(s) 1095-A, lines 21 32, column B) C. Monthly Contribution Amount (Amount from line 8b or alternative marriage monthly contribution) D. Monthly Maximum Premium Assistance (Subtract C from B) E. Monthly Premium Tax Credit Allowed (Smaller of A or D) 24 Total Premium Tax Credit: Enter the amount from line 11E or add lines 12E through 23E and enter the total here. 24 25 Advance Payment of PTC: Enter the amount from line 11F or add lines 12F through 23F and enter the total here. 25 26 Net Premium Tax Credit: If line 24 is greater than line 25, subtract line 25 from line 24. Enter the difference here and on Form 1040, line 69; Form 1040A, line 45; or Form 1040NR, line 65. If you elected the alternative calculation for marriage, enter zero. If line 24 equals line 25, enter zero. Stop here. If line 25 is greater than line 24, leave this line blank and continue to line 27. 26 Part 3: Repayment of Excess Advance Payment of the Premium Tax Credit 27 Excess Advance Payment of PTC: If line 25 is greater than line 24, subtract line 24 from line 25. Enter the difference here 27 28 Repayment Limitation: Using the percentage on line 5 and your filing status, locate the repayment limitation amount in the instructions. Enter the amount here................... 28 29 Excess Advance Premium Tax Credit Repayment: Enter the smaller of line 27 or line 28 here and on Form 1040, line 46; Form 1040A, line 29; or Form 1040NR, line 44.................. 29 F. Monthly Advance Payment of PTC (Form(s) 1095-A, lines 21 32, column C) For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 37784Z Form 8962 (2014) 5 27,570 3,216 3,600 384 600 384
Federal Income Tax Implicatons of the ACA Mandate for Individual Taxpayers 1 7 TIP
1 8 Essentials of Federal Income Taxation Form 1095-A Department of the Treasury Internal Revenue Service Part I Recipient Information Health Insurance Marketplace Statement Information about Form 1095-A and its separate instructions is at www.irs.gov/form1095a. CORRECTED OMB No. 1545-2232 2014 1 Marketplace identifier 2 Marketplace-assigned policy number 3 Policy issuer's name DRAFT AS OF October 1, 2014 4 Recipient's name 5 Recipient's SSN 6 Recipient's date of birth 7 Recipient's spouse's name 8 Recipient's spouse's SSN 9 Recipient's spouse's date of birth 10 Policy start date 11 Policy termination date 12 Street address (including apartment no.) 13 City or town 14 State or province 15 Country and ZIP or foreign postal code Part II Coverage Household 16 DO NOT FILE A. Covered Individual Name B. Covered Individual SSN C. Covered Individual Date of Birth D. Covered Individual Start Date E. Covered Individual Termination Date 17 18 19 20 Part III Household Information Month A. Monthly Premium Amount B. Monthly Premium Amount of Second Lowest Cost Silver Plan (SLCSP) C. Monthly Advance Payment of Premium Tax Credit 21 January 22 February 23 March 24 April 25 May 26 June 27 July 28 August 29 September 30 October 31 November 32 December 33 Annual Totals For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 60703Q Form 1095-A (2014)