In the past few years, the costs and regulations around health insurance have become inextricably entwined with federal income taxes. Leaving all the political debate aside, the Affordable Care Act is still very much in force. And it impacts the tax returns of millions of Americans.
Experts at TurboTax point out that although the health insurance portions of your tax return are far-reaching, complying with tax law shouldn’t be difficult if you are aware of the rules (or if you use their software). Here are some basics to keep in mind.
—Everyone has to report their health insurance status on the tax return. There is a simple box to check, indicating you have health insurance. And the IRS is not just taking your word for it. Employees of large companies may receive a Form 1095-C along with the W-2 form. Those who are covered by Medicare or Medicaid may receive Form 1095-B. And those who purchased health insurance through the Affordable Care Act marketplace receive Form 1095-A, which lists the amount of any advanced premium tax credit, the subsidy you may have received to lower your premiums.
(Keep in mind, those receiving a 1095-B or 1095-C do not need to wait for those forms to file their taxes. They are for information purposes only.)
IRS computers may be a bit outdated, but they will have no trouble matching up these forms with the information on your tax return and determining whether they should claw back some of that premium support (if you earned more than you predicted when applying) or whether you should be penalized for not having insurance. They will also know if you should have received more premium subsidy support, which could result in a refund when you file your taxes.
—Exemptions are available. There are more than 30 that can be found on the TurboTax blog or at Healthcare.gov. These exemptions can keep you from having to pay a penalty for not having health insurance. About 40 percent of those without insurance qualified for an exemption last year.
Many exemptions revolve around “affordability,” while others include being incarcerated, having had your utilities shut off in the previous year, or having some other hardship situation.
There is an excellent tool to screen for potential penalty exemptions at Healthcare.gov.
—Penalties are getting steeper. At the beginning of the Affordable Care Act, many people figured it might be less expensive to pay the penalty than to buy insurance, with all its complexities. But for 2016, the penalty for not having coverage is $695 per adult, and half as much for children, or 2.5 percent of household adjustable gross income, whichever is greater, with the penalty capped at $2,085 for a family of four. In other words, it’s expensive not to have health insurance.
—Clawbacks are possible. Those who purchase health insurance under the Affordable Care Act are required to estimate their income for the year ahead, to determine the amount of any premium subsidy. That can be difficult if you are self-employed or if your income comes from commissions. If you project too little income, you may have to repay a portion of the subsidy.
Subsidies were given if your projected income was less than 400 percent of the poverty level, or roughly $47,560 at the maximum. If your income is even $100 above that level, the entire subsidy can be reclaimed by the government. A last-minute IRA or HSA contribution, allowable until the filing date, might be the answer to keeping your income under that limit.
—Don’t forget to deduct excess medical expenses. If you’re under age 65, and medical expenses (including ACA premiums) exceed 10 percent of your adjusted gross income, they become deductible, and for those over age 65, the deduction begins when medical expenses are over 7.5 percent of AGI.
It’s not your imagination that health care insurance and tax law have combined to create a need for smart tax preparation, even for those with low incomes. And that’s The Savage Truth.