The New Tax Forms (Part 1 of 4)

Two of the major provisions of the Affordable Care Act went into effect last year: the advance premium tax credits to help people pay for health insurance and the individual shared responsibility provision, better known as the individual mandate, which requires people to purchase health insurance.

One year later, it’s now time to tell the IRS what we did, and there are three new tax forms to help us do that. We know that brokers are not tax experts and probably don’t want to be, but you’re probably also getting some questions from your clients about the new tax filing requirements, so we thought we’d give you a quick tutorial.

This is the first in a four-part series that will explain how someone without health insurance applies for an exemption or pays the penalty if he does not qualify for an exemption and how someone with insurance reconciles any advance premium tax credit received with his actual 2014 income.

We’re not tax experts and this is not intended as tax advice, but we did think that a quick run-through of the new forms may give you a better idea about what your clients are going through and possibly help you if you haven’t yet filed your taxes. For brokers who specialize in individual products, including those with a private exchange site, this tutorial should be especially helpful.

The Individual Mandate

As of January 1, 2014, most Americans are required to have minimum essential coverage or pay a tax penalty. A lot of things qualify as minimum essential coverage, including a government plan, coverage purchased in the individual market, and coverage under an employer-sponsored plan. Even coverage under a “skinny plan,” also referred to as a MEC plan (short for minimum essential coverage) will qualify.

An individual who went without minimum essential coverage still may not have to pay a penalty, though. There are a number of exemptions from the individual mandate penalty, including exemptions for members of a health care sharing ministry or members of an American Indian tribe, people who are incarcerated and people who are in this country illegally, families whose income is below the tax filing threshold, families who would pay more than 8% of their income for the lowest-price plan available, and more.

Some of these exemptions are applied for through the exchange. Others, though, are applied for when people file their taxes. To apply for an individual shared responsibility exemption, an individual completes Form 8965, Health Coverage Exemptions.

Those who went without coverage and who do not qualify for an exemption will have to pay the penalty. However, there’s not a separate tax form to do this. Instead, there’s a worksheet in the instruction booklet for IRS Form 8965, the same form used to apply for an exemption.

Premium Tax Credits

People who received an advance premium tax credit in 2014 have a different reporting requirement. The advance tax credit is just that – an advance. It’s based on someone’s prior income and what they think they’ll make in 2014. The actual tax credit they qualify for, though, is based on actual income, so the advance tax credit must be reconciled with the individual’s 2014 earnings.

Individuals who received a premium tax credit in 2014 will receive IRS Form 1095-A, the Health Insurance Marketplace Statement, to help with this process. These have already been sent out, and there were some recent news reports that about 800,000 of these forms were sent with incorrect information for the 2014 tax year, requiring some taxpayers to re-file their taxes. People with minimum essential coverage or with access to employer-sponsored coverage will also receive a Form 1095-B or 1095-C which they’ll use when determining tax credit eligibility and calculating any penalty.

Finally, IRS Form 8962, Premium Tax Credit (PTC), is the document an individual completes to reconcile his tax credit with his actual income, using the forms above as well as adjusted gross income data from their tax return.

A More Detailed Look

This is just a broad overview of the new tax forms and new reporting requirements. In Parts 2, 3, and 4, we’ll actually go through Form 8965 to show how to apply for an exemption, the instructions for Form 8965 to show how to calculate any Individual Shared Responsibility penalty, and Form 8962 to reconcile the Advance Premium Tax Credit.

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