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Millions of taxpayers may end up doing so in 2015.
Provided by Brian Damiani
If you received a 2014 health insurance subsidy, you may get an unpleasant surprise. When the Health Insurance Marketplace (HIM) went online in late 2013, Americans shopping for coverage were asked to see if they qualified for a subsidy called the Premium Tax Credit. Millions of Americans did receive this federal assistance, which made it easier for them to pay health insurance premiums. PTCs were awarded based on household size and estimated 2014 household income.1
Of course, estimates don’t always match reality. Some households earned more than they thought they would in 2014. Others experienced life events like divorces, births or deaths. Because of these developments, certain households ended up receiving PTCs that were too large for their incomes and family size.
Is yours among them? If it turns out that way, you may have to pay a percentage of that federal credit back.
How will you know if the 2014 health insurance credit you received was too large? Two new federal forms will help you find out.
Form 1095-A, akin to a health insurance W-2, is being sent out to you from the health exchange where you purchased your coverage. Form 1095-A shows you the total Premium Tax Credit that was paid to the insurer by the government on your behalf in 2014. Form 1095-A will help you (or your tax professional) fill out Form 8962, which is used to calculate the proper size of your 2014 Premium Tax Credit in light of your family size and actual 2014 modified adjusted gross income (MAGI).2
If you ended up receiving a smaller PTC than you should have in 2014, then the IRS will send you a refund representing the difference. If you received a PTC that was disproportionately large, then you are looking at repayment of a percentage of that credit.2
How much could a taxpayer have to pay back? Fortunately, the IRS has capped the repayment amount. The most an individual taxpayer has to pay back is $1,250. The cap for households is $2,500.3
The IRS also just issued Notice 2015-09, which offers taxpayers facing financial hardships another break related to this issue. Under federal standard tax law, a taxpayer would owe a penalty for failing to repay the excess advance premium tax credits back to the federal government by April 15. A penalty would also be assessed for a taxpayer whose estimated tax payments fall short of the amount due. Well, Notice 2015-09 suspends these late-payment penalties for the 2014 tax year, provided you pay your 2014 federal taxes by April 15 (or October 15 with an extension). So if the IRS notifies you of the overpayment of credits, you can claim relief from the late payment penalty by responding by letter and relief from the estimated tax underpayment penalty via submitting Form 2210 along with your 1040.1,4
Did you buy your own health insurance even though your employer offered it? If you worked for a big employer that offered a health plan but opted to buy your own health coverage instead, you might be eligible to claim a Premium Tax Credit for 2014 (and get the resulting tax refund). Your employer may or may not send you Form 1095-C, which indicates the employee share of the health insurance premium for the most inexpensive plan that the employer sponsored. If that employee share exceeds 9.5% of your 2014 income and you went out and self-insured last year, you can claim a PTC for 2014. If your employer doesn’t send you Form 1095-C, request it.2
Since household income estimates are used to determine advance Premium Tax Credits, it looks like low-income and moderate-income taxpayers who self-insure may have to continually reconcile health insurance subsidies received versus health insurance subsidies warranted.
As a last note, there is an outside chance that the Premium Tax Credit may disappear altogether. The Supreme Court will rule later this year (but probably not prior to April 15) on whether it should be offered in the 36 states that didn’t set up their own health care marketplaces. If the SCOTUS decides that it shouldn’t be offered (and therefore, shouldn’t have been offered) in those 36 states, you will see a lot of amended 2014 returns and repayment of health insurance credits.5
Brian Damiani may be reached at (925) 462-6007 or firstname.lastname@example.org
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – irs.gov/Affordable-Care-Act/Individuals-and-Families/The-Premium-Tax-Credit [1/27/15]
2 – kiplinger.com/article/taxes/T027-C000-S004-health-law-breeds-new-tax-forms.html [10/15/14]
3 – bankrate.com/finance/taxes/premium-tax-credit.aspx [1/6/15]
4 – healthaffairs.org/blog/2015/01/27/implementing-health-reform-aca-related-tax-penalties-waived-high-court-turns-back-oklahoma-ag/ [1/27/15]
5 – forbes.com/sites/anthonynitti/2015/01/10/four-things-sure-to-destroy-your-tax-season/ [1/10/15]