As we head toward 2015, some things are becoming clearer about the Affordable Care Act, while a number of issues are still not resolved.
"While there are still some questions to be answered, there are a number of issues that have been settled and that tax preparers should be aware of as we head into tax season," said Chuck McCabe, president of Peoples Income Tax and The Income Tax School.
The ACA is creating complexities that tax preparers need to consider and talk about with their clients, agreed Moss Adams partner Rich Croghan. "While the employer mandate has been delayed a year, the individual mandate has not," he said. "It's not clear how individuals are to document that they had minimum essential coverage for 2014." Moreover, he added, "The complexities of the Net Investment Income Tax are still playing out. For holders of certain foreign interests, directly or indirectly, they must consider whether to make an election to treat income the same for regular tax and NIIT purposes. This election may avoid complicated tracking of investments, but will increase an individual's tax."
"There's been quite a bit of back and forth about a disputed provision of the ACA -- the one where millions of Americans get tax subsidies," McCabe said. "The dispute is whether people who qualify for tax credits and bought insurance through the federal exchange because their state did not set up a marketplace will receive them. The law says that you qualify for tax credits if you buy insurance on an exchange 'established by the state.' The dispute is in the part of the clause that ends in 'established by the state.'
In July, a three-judge panel from the D.C. Circuit Court ruled that those who qualified for subsidies and purchased insurance on federal exchanges because their states did not set up an exchange would not receive those subsidies because they did not purchase insurance through a state exchange, McCabe explained. "The Obama administration has requested that the U.S. Circuit Court of Appeals for the District of Columbia rehear the case in front of the full complement of judges. That request was granted and the rehearing is set for December 17," he said.
A recent decision by a federal district court in Oklahoma also limited subsidies to state exchanges, while a court in Richmond has ruled to the contrary, that subsidies are available on federal exchanges.
"Tax preparers are not enforcers of the Affordable Care Act," McCabe noted. "However, we are the ones who will be on the front lines next tax season delivering the bad news to clients who didn't get the required coverage."
"If your clients purchased health insurance through any of the exchanges, there will be a new form they have to bring you from their insurance exchange before you can file their tax return. The form, Form 1095-A, lists everyone in the household who has coverage and what the government paid for each person in subsidies," he said.
FORMS FOR ALL
"Every taxpayer that walks into your office will be impacted by the Affordable Care Act," said Roger Harris, president of Padgett Business Services. "The IRS has done a good job in getting out all the information, but the law is confusing. It has a lot of moving parts that are supposed to integrate with each other. If you're a tax preparer and you haven't jumped into it and tried to figure it out, it can be overwhelmingly confusing."
A number of new forms are in play this year, he noted, including Form 8962, Premium Tax Credit, Form 8965, Health Coverage Exemption, and Form 1095-A, Health Insurance Marketplace Statement, which have all been issued in draft form. "Form 8962 is where you reconcile any premium tax credits made on your behalf with your actual income for the year," Harris said. "It determines whether you took less than you were entitled to, or whether you received an extra amount that you owe back. Form 8965, Health Coverage Exemption, is where you claim an exemption for not having health insurance. Although there's a form for the credit and for exemptions, there is no form for a taxpayer who owes the shared responsibility payment."
Form 1095-A is the form required for the upcoming tax season, Harris noted. "It's the form that explains the coverage you had through the Marketplace. If you bought family coverage, it will include all their information too. If you and your spouse both have insurance at your respective jobs but the insurance doesn't cover your children, you have to go to the Marketplace for the children and get a Form 1095-A for them. Preparers won't know how many Form 1095-As the taxpayer should have until they ask the taxpayer about each family member's coverage, and hope that they know the answers."
"Form 1095-A will be critical this year, because that's where we'll get the information to calculate the premium assistance credits," Harris said. "Without Form 1095-A, you won't be able to do that. Supposedly you can go to Healthcare.gov and get a duplicate form, but since this is the first time for everything, we don't know how well that will work and how quickly they will respond."
Forms 1095-B and 1095-C have been released in draft form. "They're optional for tax year 2014, but will be mandatory for tax year 2015," Harris observed. "Those are the forms employers use to report their coverage to their employees and where insurance companies report coverage to their customers. Unfortunately, we have no idea how many companies will actually issue those forms this year, because they're not yet required to do so."
"The Form 1095-A has to be ready by the end of January," he explained. "For taxpayers who get their W-2s in early January and rush out to file their return, they may have to wait if they bought their insurance through the Marketplace. The only place they can get the premium assistance credit is through the Marketplace."
YOUR JOB, WHETHER YOU LIKE IT ...
"As tax practitioners, we are supposed to know whether our clients had coverage, how they had coverage, and if it was minimum essential coverage. Yet Forms 1095-B and C are not required this year, so it presents a challenge," Harris said.
"Every tax return will have to be dealt with in terms of one of three things: Either the taxpayer has minimum essential coverage, or is eligible for an exemption, or owes a shared responsibility payment or penalty. You're just not going to have all the forms and reporting from third parties for 2014 to know which of those three apply."
"We'll be relying on taxpayers' knowledge when they're not prepared to answer the questions because they never had to answer them before," he said. "And preparers will have to spend a lot more time educating their clients on the rules. I wouldn't expect our clients to know all the answers, even presuming they are relatively knowledgeable."
There's a "quick and easy" way that preparers can use to avoid answering the difficult questions, Harris said. "Line 61 on draft Form 1040 has a new line labeled 'Health care: individual responsibility,'" he said. "There's a box to check that says, 'Full-year coverage.' If you check the box, you're done. My fear is that the less-than-knowledgeable preparers will figure out that if they check the box they can finish the return without going into all the research, and there will be nothing wrong from the standpoint of the software diagnostics."
"It's a fast way to make a return look good," he said. "Since all the reporting [on Forms 1095-B and C] is not required, this year in particular will be a challenge. It will be better next year because we'll have those two forms, but it still won't be perfect, because smaller employers - those with less than 50 employees - don't have to complete the forms."
It will be several filing seasons before everything runs smoothly, Harris predicted: "We've never been through a filing season with all these requirements. We're all jumping in at the same time, and none of us know how anyone will react because no one has ever done it before."
Will this drive more taxpayers to seek the services of tax professionals? "It is going to drive more people to paid preparers," Harris said. "And paid preparers will be more expensive, or more people will file incorrect returns."
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