[IMGCAP(1)]The summer months are typically the time that CPAs fall out of touch with their clients. Some may send out or email one or two newsletters, but most taxpayers and preparers have thoughts that are far from next year’s taxes.
However, this year it is more important than ever that preparers stay in touch with their clients, in order to insulate them from surprise at the penalties they may be liable for next year.
“We’ve passed the deadline for individuals and families to obtain required health care coverage to avoid being penalized,” observed Chuck McCabe, founder and president of Peoples Income Tax and The Income Tax School.
“As tax preparers, we are not enforcers of the Affordable Care Act,” he explained. “However, we are the ones who will be on the front lines next tax season delivering the bad news to clients who failed to obtain the required health care coverage. Educating your clients now is important so they will not be surprised next tax season when they will have a penalty added to their income tax.”
For starters, McCabe recommends that clients be made aware of the consequences of not being covered. The penalty (known as an “individual responsibility payment”) is calculated one of two ways, McCabe noted. “However, the client will pay the greater of the two,” he said.
1 percent of your yearly household income. (Only the amount of income above the tax filing threshold, $10,150 for an individual, is used to calculate the penalty.) The maximum penalty is the national average monthly premium for a bronze plan based on individual factors.
$95 per person for the year ($47.50 per child under 18). The maximum penalty per family using this method is $285.
The penalty increases every year, McCabe noted. “In 2015 it will be 2 percent of your income or $325 per person. In 2016 it will be 2.5 percent of your income or $695 per person, and then it’s adjusted for inflation in the years to follow.”
“Let’s say your client missed the deadline, but obtains qualified insurance at some point during the year,” he added. “The penalty is calculated as 1/12 of the yearly penalty times the number of months the person was not insured. If your client was uninsured for three months or less out of the year, then there is no penalty,” he said.
“The second thing your clients need to know is how to obtain coverage if they don’t currently have coverage,” McCabe said. “While the open enrollment period for getting insurance through the Marketplace is closed, people can still obtain insurance on their own through their employers or through private entities.”
Employer plans must offer minimum coverage for all full-time employees if the company has at least 50 employees, so directing them to their employer is one option. If that is not the case, they can shop for insurance on their own, McCabe indicated. “They can also wait until the next open enrollment period and shop on the Marketplace. The next open enrollment period begins Nov. 15, 2014. While they will have to pay a penalty for not being insured from March through October, depending on their situation, it may be best to wait.”
Some individuals may qualify for the special enrollment period while the Marketplace is closed. This applies to people who have had a “qualifying life event” like changes to family size or a “complex situation related to applying in the Marketplace.” The special enrollment period is 60 days following a “qualifying life event.”
There are people who are exempt from the individual responsibility payment. Exemptions are given for the following reasons:
You were uninsured for less than three months;
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 (here’s more information about the filing limit);
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 health care sharing ministry;
You’re a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare;
You’re incarcerated, and not awaiting the disposition of charges against you; or
You’re not lawfully present in the U.S.
There are also several hardship exemptions to be aware of for people in situations where they are unable to purchase health insurance, e.g., if they were homeless, recently experienced domestic abuse, and a number of other reasons.
“If your client qualifies for an exemption, they will need to fill out an application for exemption on healthcare.gov,” McCabe said.
Clients who have obtained healthcare coverage through the Marketplace may be eligible for a Premium Tax Credit. This tax credit is to make purchasing health insurance more affordable for people with moderate incomes. According to irs.gov, you are eligible if you:
buy health insurance through the Marketplace;
are ineligible for coverage through an employer or government plan;
are within certain income limits;
do not file a Married Filing Separately tax return (unless you meet the criteria in Notice 2014-23, which allows certain victims of domestic abuse to claim the premium tax credit using the Married Filing Separately filing status for the 2014 calendar year); and
cannot be claimed as a dependent by another person.
Individuals who qualify can choose to get the credit now and have it sent directly to their insurance company, or claim the full amount when they file their 2014 or 2015 tax return.
As for tax preparers, there are many questions yet to be answered, according to McCabe. “For example, what forms are needed, how do you verify compliance and are there penalties for tax preparers that are not compliant with the ACA procedures?”
The IRS will release that information in the months ahead, McCabe indicated.