This year, more than ever, it is important that preparers be knowledgeable about the taxes and penalties associated with the Affordable Care Act, to better insulate their clients from any surprises that might be in store for them when they prepare their taxes 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. 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, or individual responsibility payment, is calculated one of two ways, McCabe noted. "However, the client will pay the greater of the two," he said.
The two calculations are:
- 1 percent of 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 explained. "The penalty is calculated as one-twelfth of the yearly penalty times the number of months the person was not insured. If your client was uninsured for two months or less out of the year, then there is no penalty."
"The second thing your clients need to know is how to obtain coverage if they don't currently have coverage," McCabe continued. "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 those who have had a "qualifying life event" like changes to family size or a "complex situation related to applying in the Marketplace." The special period is 60 days following a "qualifying life event."
There are people who are exempt from the individual responsibility payment, McCabe noted. 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.
- 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.
- You're not lawfully present in the U.S.
Clients who have obtained health care 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.
THE PRACTITIONERS' PERSPECTIVE
For tax preparers, there are still a number of questions to be answered, McCabe observed. "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?"
These and other unanswered questions will be the biggest challenge of the next year's tax season, according to Roger Harris, president and chief operating officer of Padgett Business Services.
In addition to the regular exemptions from the shared responsibility payment, he cited the hardship exemptions described on the Health and Human Services Web site. They include being homeless; being evicted in the past six months; receiving a shut-off notice from a utility company; the recent experience of domestic violence; recent experience of the death of a close family member; fire, flood or other natural or human-caused disaster; filing for bankruptcy in the past six months; and "You experienced another hardship in obtaining health insurance."
Any of these exemptions could cause issues for the preparer, Harris observed. "For example, if you recently experienced the death of a close family member, they ask you to submit a copy of the death certificate or notice. That simply proves that somebody died, not that they were a close family member. What if someone walks in with a death notice with a completely different name and says, 'This was my same-sex partner.' If the practitioner is to be the judge and jury on the front end, what's the due diligence requirement?"
And utility bill shut-off notices are not uncommon, he noted. "Someone brings in a shut-off notice, and I tell them they don't have to buy insurance, but the IRS examines it and says, 'Yes, you do.' Do I have the right to appeal to HHS?"
"And how long are the exemptions good for -- the rest of the year, or next year as well? I can read these exemptions as narrowly or as broadly as I want," Harris said. "Number 14 -- 'You experienced another hardship in obtaining health insurance' - says, 'Please submit documentation if possible.' That's like the IRS saying, 'We're questioning your auto expenses. Please submit documentation but it's OK if you don't.' When HHS is trying to write tax regulations, they don't fully know what's involved. The IRS would understand why something as broad as the death of a 'close family member' needs more than just an obituary from a newspaper to qualify."
"You can sit around and complain, or go out and talk to business owners and become a resource to guide them through this," Harris said. "They may question why you would want to charge people to explain a law they don't like, but at the end of the day it's still the law. Turn it into an opportunity to build your business."
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