THE BLOG
10/07/2013 12:40 pm ET Updated Dec 07, 2013

The Affordable Care Act and Your Taxes

There's a lot of information floating around about the Affordable Care Act (ACA), and it is increasingly difficult to understand what the tax implications are -- and there are many. Beginning in 2014 there are two important tax implications of the ACA:

• A Tax Credit to help you pay your insurance premiums, if you qualify
• Tax Penalties if you do not have health insurance

What does that mean? Your health insurance is now tied to your taxes. The Premium Tax Credit is a refundable credit to help offset the cost of health insurance premiums for qualifying taxpayers, beginning in 2014. There are two options for claiming the credit. You can choose to take an advance payment of the advanced credit based on your estimated income and family size for the year. An equal portion of the estimated credit is paid directly to the insurance company each month during the tax year. When tax time comes around and you file your return, you must compare the prepaid credit against the actual credit allowed. If the there is a difference in the prepayments and the actual credit (i.e. if your income or family size is different than what you expected at the beginning of the year), you could be owed more premium tax credit, which would increase your refund. However, you could also be required to repay to the IRS the amount of any excess prepaid credit. In other words, if you do not use all of your credit, you may get more back when you file your tax return. Alternatively, if you take too much credit during the year to pay for your health insurance premiums, you may owe money back to the IRS when you file your tax return. You can also choose to pay your premiums out-of-pocket each month and collect the full credit when you file your taxes.

The amount of credit available for prepayment is calculated by the new Health Insurance Marketplaces (also known as exchanges). To qualify for the credit, your income must meet certain guidelines. For some people, if their income is below a certain level, they may be eligible for coverage under their state's Medicaid program, which is free. These taxpayers would not be eligible for the tax credit. Taxpayers who are enrolled in an insurance plan through their employer would also not be eligible for the credit.

Because the prepayment of the credit is based on estimated income and family size as reported to the insurance marketplace, taxpayers should notify their state's marketplace if there is a change in household income or in family size that could affect the amount of their actual credit. Changes in family size can include the birth or adoption of a child, a child moving out of the household, parents moving into the household, marriage or divorce. The Premium Tax Credit is not allowed if the taxpayer files using the Married Filing Separately status. Like the Child Tax Credit, the parent who claims a child's dependent exemption will include the child in the family household size when determining the amount of credit.

Sound confusing? It is. However, you don't want to ignore the requirement to purchase insurance because of the confusion, because if you don't have insurance after February 15, 2014, you may be assessed a tax penalty. The Shared Responsibility Provision allows a penalty assessment on certain taxpayers without insurance coverage and qualified employers who do not offer insurance. But I'll get into how the penalty works next week.

The ACA seeks to help millions of Americans without health insurance obtain affordable coverage. But it can be confusing. If you do not pay attention to the rules you could miss out on benefits or worse, owe a big payment back to the IRS in the future. Now is the time to choose a tax return preparer that can not only help you with your tax return, but can answer all your tax questions including those pertaining to the ACA tax rules and regulations. Do not miss out on the benefits and more importantly do not take credits and benefits without knowing the rules. Some additional work or a trusted advisor on the front end of enrollment can save you a great deal of money early on or prevent a big headache later.