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New IRS Publication explains how individuals report health care coverage on 2014 returns

IRS Publication 5187, Health Care Law: What’s New for Individuals and Families.

The upcoming tax season will be complicated not only by the many tax provisions extended at the last moment by the Tax Increase Prevention Act of 2014 (TIPA), but also by the first-time appearance on the return of the individual shared responsibility (ISR) provisions of the Affordable Care Act (ACA). As detailed by new Publication 5187 (Health Care Law: What’s New for Individuals and Families), these provisions will result in complex calculations, and new tax return entries, for taxpayers who are exempt from carrying minimum essential health insurance coverage, are required to make an individual shared responsibility payment (SRP), or are entitled to premium tax credits. However, taxpayers who carried minimum essential coverage will only have to check off one box on their return.

Who is subject to the ISR rules? All U.S. citizens are subject to the ISR rules, as are all non-U.S. citizens who are in the U.S. long enough during a calendar year to qualify as resident aliens for federal income tax purposes. Foreign nationals who live in the U.S. for a short enough period that they do not become resident aliens for tax purposes are exempt from the ISR provision even though they may have to file a U.S. income tax return.

All bona fide residents of U.S. territories are treated as having minimum essential coverage and are not required to take any action to comply with the ISR provisions other than to indicate their status on their federal income tax returns.

What must be reported on the tax return? All individuals subject to the ISR rules use their 2014 income tax return to:

1. Report that they have qualifying health care coverage (also called minimum essential coverage), or
2. Show they qualify for an exemption from coverage, or
3. Make an individual shared responsibility payment.

What is minimum essential coverage? This is a health care plan or arrangement specifically identified in the law as minimum essential coverage, including:

  • Employer-sponsored coverage under a group health plan (including self-insured plans).
  • Specified government-sponsored programs (e.g., Medicare Part A, Medicare Advantage, most Medicaid programs, Children’s Health Insurance Program (CHIP), most TRICARE programs (for eligible active and retired service members), and comprehensive health care coverage of veterans.
  • Individual market coverage (e.g., a qualified health plan purchased through the Marketplace or individual health coverage purchased directly from an insurance company).
  • Grandfathered health plans (in general, certain plans that existed before the ACA and have not changed since the ACA was passed).
  • Other plans or programs that the Department of Health and Human Services (HHS) recognizes as minimum essential coverage for the purposes of the ACA.

How to report minimum essential coverage. Taxpayers whose entire tax household had minimum essential coverage for each month of their tax year will indicate this on their federal income tax return by simply checking a box on their Form 1040, 1040A or 1040EZ. On Form 1040, they’ll check the “full year coverage box” at Line 61 (Health care: individual responsibility (see instructions)). No further action is required.

Qualifying exemptions from health coverage. A taxpayer is exempt from having to carry minimum essential coverage if:

…The amount he would have paid for the lowest cost employer-sponsored coverage available or for coverage through the Marketplace is more than 8% of his household income for the year.
…He went without minimum essential coverage for less than 3 consecutive months during the year.
…His household income is below the taxpayer’s minimum threshold for filing a tax return.
…He was neither a U.S. citizen, U.S. national, nor an alien lawfully present in the U.S.
…He was a member of: a health care sharing ministry (i.e., an exempt organization whose members share a common set of ethical or religious beliefs and have shared medical expenses in accordance with those beliefs continuously since at least Dec. 31, ’99); a religious sect that has been in existence since Dec. 31, ’50, and is recognized by the Social Security Administration as conscientiously opposed to accepting any insurance benefits, including Medicare and social security; or a federally-recognized Indian tribe, including an Alaska Native Claims Settlement Act (ANCSA) Corporation Shareholder (regional or village), or is otherwise eligible for services through an Indian health care provider or the Indian Health Service.
…He was in a jail, prison, or similar penal institution or correctional facility after the disposition of charges.

A taxpayer is also exempt if an event or condition prevents an individual from obtaining minimum essential coverage, such as: he’s ineligible for Medicaid solely because the state in which the individual resides does not participate in the Medicaid expansion under the ACA; or he bought a qualified health plan through the Marketplace during the initial open enrollment period, but the coverage is not effective until April 1 or later.

How to report exemptions from health coverage. Taxpayers claim coverage exemptions on Form 8965, Health Coverage Exemptions, and attach it to Form 1040, Form 1040A and Form 1040EZ.

Individual shared responsibility payments. A taxpayer will need to make an individual shared responsibility payment (SRP) when filing his federal income tax return if: anyone in his household does not have minimum essential coverage; and does not qualify for a coverage exemption.

For 2014, the annual SRP amount is the greater of:

a. 1% of the household income that is above the tax return filing threshold for the taxpayer’s filing status; or
b. the family’s flat dollar amount, which is $95 per adult and $47.50 per child (under age 18), limited to a family maximum of $285.

In general, household income is an individual’s modified adjusted gross income (MAGI) plus that of every other individual in his family for whom he can properly claim a personal exemption deduction and who is required to file a federal income tax return. MAGI for this purpose is AGI on the federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the tax year. It doesn’t include Supplemental Security Income (SSI).

The annual SRP amount as calculated above is capped at the national average premium for a bronze level qualified health plan available through the Marketplace that would cover everyone in the tax household who does not have coverage and does not qualify for a coverage exemption.

Taxpayers owe 1/12th of the annual SRP for each month they or their dependent(s) do not have coverage and do not qualify for a coverage exemption.

RIA illustration: A married couple with two under-18 children have $70,000 of household income for 2014. They did not have minimum essential coverage for any family member for any month during 2014 and no one in the family qualifies for a coverage exemption. For 2014, their filing threshold is $20,300. Their annual SRP amount is the greater of:
a. $70,000 (2014 household income) − $20,300 (filing threshold) × .01 = $497; or
b. ($95 per adult × 2) + ($47.50 per child × 2) = $285.
Assuming that the applicable national average bronze plan premium exceeds the flat dollar and income percentage amounts, the couple’s shared responsibility payment is $497 for 2014, or $41.41 per month for each month the family was uninsured (1/12 of $497 = $41.41).

Detailed information on the cost of bronze level plans is available at .

The percentages and flat dollar amounts will increase. In 2015, the income percentage will be 2% of household income, and the flat dollar amount will be $325 per adult and $162.50 per child under 18. In 2016, these figures increase to 2.5% percent of household income and $695 per adult ($347.50 per child under 18). After 2016, the flat dollar amounts may increase with inflation.

Pub 5187 notes that IRS is prohibited from using liens or levies to collect any ISR payment. If taxpayers owe such a payment, IRS may offset that liability with any tax refund that may be due to them.

How to report individual shared responsibility payment. The ISR payment is computed on a worksheet in the Instructions to Form 8965 and is entered and on Form 1040, line 61; Form 1040A, line 38; or Form 1040EZ, line 11.

Premium tax credit and advance payments. Taxpayers who bought a qualified health plan from a State-based or Federally-facilitated Health Insurance Marketplace (Marketplace) may be eligible for a premium tax credit.

In general, taxpayers are allowed a premium tax credit if:

  • The taxpayer, spouse (if filing a joint return), or dependents were enrolled at some time during the year in one or more qualified health plans offered through the Marketplace, and one or more of them was not eligible for other minimum essential coverage during the months they were enrolled in the qualified health plan through the Marketplace;
  • The taxpayer’s income is at least 100% but not more than 400% of the federal poverty line (FPL) for the taxpayer’s family size.
  • If married, the taxpayer files a joint return with his or her spouse (unless the taxpayer is considered unmarried for Head of Household filing status, or meets the criteria in Notice 2014-23, or T.D. 9683 (see Weekly Alert ¶  3  07/31/2014), which allows certain victims of domestic abuse or spousal abandonment to claim the premium tax credit using the MFS filing status).
  • The taxpayer cannot be claimed as a dependent by another person.

The premium tax credit for 2014 is based on the 2013 federal poverty lines that were available when the open enrollment period began on Oct. 1, 2013 (see ).

If eligible for advance credit payments of the premium tax credit, taxpayers may choose to: have some or all of the estimated credit paid in advance directly to the insurance company to lower what is paid out-of-pocket for monthly premiums; or wait to get the benefit of the credit when they file their tax return

The amount of advance credit payments will appear on Form 1095-A, Health Insurance Marketplace Statement issued by the Marketplace.

A taxpayer’s premium tax credit for the year may differ from the advance credit payment amount estimated by the Marketplace because the taxpayer’s family size and household income are estimated at the time of enrollment. If there’s a difference between the actual and advance credit amounts, they will be have to be reconciled on the taxpayer’s tax return.

Claiming the premium credit on the return. On Form 8962, Premium Tax Credit, a taxpayer must subtract the advance credit payments for the year from the amount of his premium tax credit calculated on the tax return. If the premium tax credit computed on the return is more than the advance credit payments made on the taxpayer’s behalf during the year, the difference will increase the refund or lower the amount of tax owed. This will be reported in the Payments section of Form 1040.

If the advance credit payments are more than the premium tax credit (an excess advance credit payment), the difference will increase the amount owed and result in either a smaller refund or a balance due. This will be entered in the Tax and Credits section of the return. There may be a limitation on the amount of tax liability a taxpayer owes as a result of an excess advance credit payment. The limitation is based on the taxpayer’s household income.

For taxpayers with household income below 400% of the FPL, the amount of tax liability due to excess advance credit payments is limited as provided at Code Sec. 36B(f)(2).

RIA observation: In March, the Supreme Court will hear oral arguments on a case dealing with the validity of IRS regs under Code Sec. 36B allowing premium tax credits for insurance purchased on either a State or federally-established Exchange. If the Court invalidates the regs, taxpayers who got advance credits might have to pay them back, although it’s possible the Court, Congress, or IRS would take mitigating actions. See ¶ 27 for more details.