Taxes are a pain. Health insurance is a pain. This year, Americans will suffer both when they file their income taxes. Ouch.
The Affordable Care Act, aka Obamacare, inserted health insurance into tax season in two ways, affecting nearly all of us. The first is the law's mandate that almost all U.S. residents get health coverage or pay a penalty. The second is the tax-credit subsidy that millions of Americans received via Obamacare's exchanges to lower their health insurance premiums.
Oh, and there are new IRS forms, too.
"The ACA has made health care a tax issue and, in that sense, everyone will see an impact on their tax return this year," said Kathy Pickering, executive director of the Tax Institute at H&R Block. "It may potentially impact their refund."
The tax-filing deadline is just two weeks away, on Wednesday, April 15. Before you freak out, rest assured that little has changed for about 80 percent of Americans. Still, some people will have to jump through new hoops -- and might see big effects on their tax refunds or bills.
It's easy enough to figure out which camp you fall into. Here's what each group of Americans will have to do:
I Get Health Coverage From An Employer Or A Government Program Such As Medicare Or Medicaid
When you file your return, you hardly have to do anything different. There's a new line on the 1040 -- line 61, to be precise -- where you attest that you did, in fact, have health coverage this past year. If that's the case, then mark it down here, and you're done.
"All that they will need to do is, in effect, check a box on the front of the return," Pickering said.
Make sure it's true that everyone in your household was covered in 2014, though, including those who may have had different insurance from you.
For the more than 8 in 10 Americans who had one of these forms of coverage, tax filing is pretty much business as usual this year. So it's horrible, but not more horrible.
I Bought My Health Insurance From An Obamacare Exchange And Got Tax Credits
The good news is, tax credits made your health insurance more affordable. The bad news is, you now have to prove you had insurance this past year, and that you didn't get too much or too little of a subsidy. If your tax credit was too large, you'll have to pay back at least some of it. Almost 12 million people nationwide enrolled through an exchange for this year, and 87 percent of them qualified for tax credits.
If that's you, the first thing you'll need is one of those new forms, the 1095-A. The health insurance exchanges for each state -- whether federal or state-run -- sent these to households that bought private insurance policies from them (as opposed to Medicaid or the Children's Health Insurance Program). This is your proof of insurance.
Those 1095-A forms were supposed to arrive in your mailbox by Feb. 2, but there have been complications. The federal government provided incorrect information to hundreds of thousands of customers who used HealthCare.gov, and some state exchanges, including California's and Minnesota's, also had problems. If you already filed your taxes based on these inaccurate numbers, the IRS won't require you to refile, but taxpayers who think they'd get a bigger refund if they refiled can do so.
If you don't have your 1095-A, you can download the form from the exchange website or call your exchange and ask it to send you one. You may get more than one form, depending on how each member of the family was covered. If you see any inaccuracies on these documents, contact your insurance exchange.
The 1095-A shows how much your total insurance premium was and how large a tax credit you got each month you were covered. You'll need that information to fill out another form, called the 8962. (Yes, a form to fill out a form.)
There's a lot of gobbledygook behind it, but basically the IRS needs to make sure you got the right amount of financial assistance for your health coverage.
When you applied for a credit, you told the exchange what you expected to earn in 2014, and that number was used to calculate your subsidy. Now, when you file the 8962 with your taxes, you're running the numbers again based on what you really made. If those amounts are different, your tax credits will have to be adjusted. People who owe the IRS can set up payment plans.
How many people will see their refunds cut (or face a tax bill), and how many will get money back? The answer, according to the Henry J. Kaiser Family Foundation, is that half of tax credit recipients will owe at least some money to the IRS because their incomes were higher than anticipated, while 45 percent of them will get bigger refunds because their income was lower than they estimated. The average amount owed will be $794, with higher-income earners being required to repay more than low-income households, and the average refund will be $773, the Kaiser Family Foundation estimates.
It makes sense: People's incomes and lives change all the time. Maybe you got a raise. Maybe your hours were cut. Maybe you got married. Obamacare customers are supposed to report changes like that to the exchanges so their subsidies can be adjusted during the year. The maximum amount anyone may owe the IRS varies by income and family size, from $300 to $2,500 for those who earned between the federal poverty level -- which was $11,670 for a single person last year -- and four times that amount. Anyone who received tax credits but whose income exceeded 400 percent of the poverty level could have to pay back all the tax credits they received.
Oh, here's another annoying thing: If you got Obamacare subsidies, you can't file your income taxes with the 1040-EZ. Instead, you have to use the longer 1040.
I Have Health Insurance That Isn't From A Job Or The Government And I Didn't Get Any Tax Credits
About 15 percent of people who bought their policies through an exchange didn't get subsidies, and a few million more bought policies directly from an insurance company, bypassing the exchanges. These folks have to do more than people with job-based insurance or Medicare, but less than their subsidized neighbors.
Basically, if you bought an unsubsidized plan from an Obamacare exchange, take the information from your 1095-A and put it on your 8962, and check off line 61 of your 1040. If you didn't use an exchange and bought your insurance directly from the company, you just need to care about line 61. When it comes to taxes, that counts as easy.
One more thing for unsubsidized people who used an exchange: You might still be able to get tax credits. If you earned less than four times the federal poverty level -- meaning $46,680 for a single person and $95,400 for a family of four -- you can apply for a subsidy via the exchange. If you skipped the exchange, then this isn't possible, no matter what your income was.
I Don't Have Health Coverage At All
Obamacare's individual mandate requires most legal U.S. residents to get covered, so you might be subject to a tax penalty if you were uncovered for more than three months. The formula is complicated, but the penalty starts at $95 and goes all the way up to about $11,000. (Read this for more information.) If you didn't earn enough money to pay taxes, meaning you made less than $10,150 as a single person under 65 or more for other types of households, then there's no health insurance mandate for you, and you don't have to file a return.
There are tons of exemptions to the Obamacare mandate, but you have to apply for most of them. The IRS and the Department of Health and Human Services really want to make sure that people who are exempt avoid the penalty, and they launched a public outreach campaign last month to get the word out. As part of that, federal authorities created a tool on HealthCare.gov designed to help taxpayers figure out whether they can get an exemption from the mandate and the fine, and to explain how to apply.
The majority of exemptions are granted by the IRS, but some have to come from the exchange. You'll need form 8965 to include a mandate exemption on your tax return.
The idea behind the mandate was that everyone who can "afford" insurance should buy it, to avoid saddling the rest of us with the cost of their medical care. The Affordable Care Act says insurance is "affordable" if it costs 8 percent of your income or less. If insurance was available to you below that price and you didn't get coverage, you'll have to pay a penalty.
If you really couldn't find "affordable" coverage, then you're exempt. But you do have to document that to the IRS. Other exemptions you can claim on your tax return include living abroad or being in prison.
For some exemptions, you'll have to apply to your insurance exchange. Those exemptions include belonging to a religion that objects to insurance; living in a state that didn't expand Medicaid under Obamacare and left you ineligible for low-cost or free coverage; or getting your pre-Obamacare insurance policy canceled. And the exchanges will provide "hardship" exemptions for a slew of reasons, like being evicted or filing for bankruptcy.
You can file your taxes and claim those exemptions while waiting for your exchange to tell you whether you're exempt. If it says no, then you can sort that out with the IRS later. And people who owe the penalty for 2014 and don't have health insurance this year are allowed to sign up for a plan in most of the country, because the federal government and almost all state-run exchanges re-opened enrollment to accommodate tax filers in these circumstances. Getting covered now won't make the 2014 fine go away, but it will eliminate or reduce the penalty you would otherwise owe a year from now.
I Need Help!
Yeah... about that. Calling the IRS telephone hotline will probably be a nightmare, in large part because of budget cuts. The health insurance exchange hotlines can provide help with issues like exemptions from the mandate, but not with other tax questions. There are other options for assistance, thankfully, but you'd better hurry -- April 15 is right around the corner.
Companies like H&R Block, as well as accountants in your area, will do your taxes with you, for a price. There are online applications, such as Intuit TurboTax, that also charge money. Some of these companies offer some free assistance as promotion for their paid services.
If you made less than $60,000 a year in 2014, you can use the IRS' Free File option, but you'll still have to do a lot of math yourself. If you made less than $53,000 a year, you can take advantage of tax preparers participating in the IRS' free Volunteer Income Tax Assistance program. The IRS' Tax Counseling for the Elderly program is available at no charge to people 60 and older. And Enroll America will offer no-cost local help using Intuit TurboTax.
An earlier version of this story was published on Jan. 26 with the headline "Here's How Obamacare Is Going To Affect Your Taxes."