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Surgent's Tax Issues Newsletter




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Affordable Care Act (Part II)

9/17/2014


Practitioners will experience considerably more issues during the coming tax season as a result of the application of the individual mandate and, for taxpayers who don’t receive health coverage from their employers, the calculation of premium credits.

Individual mandate
Individual taxpayers, unless they are exempt, must carry minimum essential coverage for themselves and their dependents or pay an additional tax. Those individuals who do not have coverage and do not qualify for an exemption will need to make an individual shared responsibility payment. The draft of Form 1040 shows that the individual responsibility payment is treated as another tax on Line 61; those who have coverage for the full year will check a box and make no entry. But for those that don’t, there is no separate Form. Rather, there is a worksheet included in the Form 1040 instructions to calculate the shared responsibility payment, but the worksheet will not be required to be attached to the tax return. Such a worksheet or instructions have not been issued in draft form.

In general, the payment amount is either a percentage of the individual’s income or a flat dollar amount, whichever is greater. The amount owed is one-twelfth of the annual payment for each month that a person or the person’s dependents are not covered and are not exempt.

For 2014, the payment amount is the greater of either 1 percent of the person’s household income that is above the tax return threshold for the person’s filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment is capped at the cost of the national average premium for the “bronze level” health plan available through the health insurance marketplace in 2014.

The IRS offers an example in which Jim, an unmarried individual with no dependents, does not have minimum essential coverage for any month during 2014 and does not qualify for an exemption. For 2014, Jim’s household income is $40,000 and his filing threshold is $10,150. Under the income formula, subtract $10,150 (filing threshold) from $40,000 (2014 household income). The result is $29,850. One percent of $29,850 equals $298.50. Jim’s flat dollar amount is $95. Jim’s annual national average premium for bronze level coverage for 2014 is $2,448. Because $298.50 is greater than $95 and is less than $2,448, Jim’s shared responsibility payment for 2014 is $298.50, or $24.87 for each month he is uninsured (1/12 of $298.50 equals $24.87). Jim will make his shared responsibility payment for the months he was uninsured when he files his 2014 income tax return.

Premium credits
Individuals who purchase health insurance from the Marketplace or Exchange may be eligible for a refundable tax credit for premiums paid. The process of obtaining that credit can be initiated at the Marketplace through an advanceable credit against premiums paid, reducing the taxpayer’s out-of-pocket currently; or it may be deferred to the tax return. Those who buy insurance on the Exchange will receive a Form 1095-A that provides important information the taxpayer and the preparer will need in order to calculate the tax credit and reconcile the actual amount of the credit with the tax credit received; if the credit advanced by the Marketplace was less than the entitlement, the deficiency is treated as a tax payment on Line 69, but if the advance exceeded the amount of the entitlement, the excess is treated as an income tax in addition to the AMT and the regular tax, reported on Line 46. If the taxpayer took no advance, the entire amount of the entitlement will be treated as a tax payment on Line 69.

The Marketplace determines the amount of the advanceable credit based on data the taxpayer provides it at the time the taxpayer applies for coverage (and presumably annually or when coverage changes). The parameter that has the greatest impact on the entitlement is the household MAGI, i.e., the sum of the AGIs of the taxpayer and dependents, modified for tax-exempt income and foreign earned income. Household income can deviate from the projection at the time of the application for various reasons, and such difference can change the actual entitlement from the entitlement projected at the time of application that will result in an excess or deficiency of the income tax credit. Another parameter that can change the entitlement is the size of the family. Practitioners should be aware that some credit may be available for people making less than 400 percent of the United States Poverty Level, and this, in turn, depends on the size of the family. The Poverty Level for a family of five in the contiguous United States (there are separate tables for Alaska and Hawaii) is $27,910, so a household could have as much as $111,639 of household income and be entitled to a premium tax credit. If a child is born during the year, the size of the family increases and generally the amount of the entitlement premium tax credit does as well. And if the taxpayer moves to an employer that provides health insurance after a purchase on the Exchange, this change of circumstances will also affect the reconciliation of the tax credit.

Practitioners will flow data from the Form 1095-A to Form 8962 to reconcile and determine the entry for Line 46 or Line 69, as the case may be.

These are just two of the complexities that return preparers must be ready for in the coming tax season and that must be reflected in their questionnaires, and that are addressed in A Practical Guide to Small Business Health Insurance and Fringe Benefits: 2014 and Beyond (OBCR) and The Best Federal Tax Update Course by Surgent (BFTU).

 

Affordable Care Act (Part II)

9/17/2014

Affordable Care Act Compliance – The Forms (Part I)

8/12/2014

Affordable Care Act Compliance – The Forms (Part I)

8/12/2014

Circular 230 Changes ... For the Better

6/24/2014

Getting More Active with the Passive Activity Rules and the New Net Investment

3/12/2014

To Capitalize or Not to Capitalize – That is the Question (Part III)

12/9/2013

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