Filing your federal income taxes this year will be most interesting.
That’s because this is the first time Americans will experience the complex connections between the Affordable Care Act and taxes.
Here’s a rundown of how all this will work.
People who have health insurance: “For the vast majority of Americans, tax filing under the Affordable Care Act will be as simple as checking a box to show they had health coverage all year,” said Treasury Secretary Jacob J. Lew.
On Line 61 of the 1040 tax form, you must indicate that you, your spouse (if you’re filing a joint return) and your dependents had health insurance last year.
If you bought health insurance through the health insurance marketplace, you will receive IRS Form 1095-A, Health Insurance Marketplace Statement, from the exchange. It will list which members of the household were covered and for how long, as well as premium costs and any advance payment you received for premium tax credits.
If you got the tax credit, you will need to file Form 8962, Premium Tax Credit, with your tax return. You will need information from the 1095-A form to fill out Form 8962.
Claiming an exemption from the penalty: “A fraction of taxpayers will take different steps, like claiming an exemption if they could not afford insurance,” Lew said.
Those seeking an exemption must file Form 8965, Health Coverage Exemptions, with their tax return. It lists the possible exemptions and lets you claim the one that might apply.
Taxpayers who must pay a penalty: “A smaller fraction of taxpayers will pay a fee if they made a choice to not obtain coverage they could afford,” Lew said.
The penalty for 2014 is $95 per person (with a family maximum of $285) or 1 percent of your yearly income, whichever is higher. Only the amount of income above the tax filing threshold, about $10,000 for an individual, is used to calculate the penalty. Your filing threshold is the minimum amount of gross income a person your age and filing status must make to be required to file a tax return.
“Many people still believe that the penalty is $95 per person,” said Kathy Pickering, executive director of the H&R Block Tax Institute. “If you’ve got a couple that’s making $65,000 a year, and the spouse didn’t get insurance, now they’re thinking it’s $95. But when they come in to do the calculation, they’re going to learn that the penalty is actually $447, and that’s a lot higher than the $95 they might have been expecting.”
The penalty for not having health insurance increases every year. For 2015, it will be $325 per person with a maximum of $975 for a family, or 2 percent of your yearly income.
Those who received advance tax credit payments: The premium tax credit is for certain consumers who bought health insurance through the health insurance marketplace, and it reduces the amount of tax owed. The government makes advance payments of the credit to help consumers pay a share of their monthly health insurance premiums.
The advance payments are based on an estimate of the credit that you will claim on this year’s tax return. That estimate is based on a formula that takes into account income, household size and health insurance costs in your community.
Those who got too much of a subsidy will see their tax refunds reduced by the IRS. For example, you will get dinged if your income went up during the year and you didn’t report that to HealthCare.gov or to your health insurance exchange.
If you received less of a subsidy than you were entitled to, the IRS will owe you instead.
This part is going to trip up many taxpayers.
“When people went to the marketplace to sign up for insurance, at that point, they were estimating what they thought their 2014 income was going to be,” Pickering said. “Now, they’re filing their tax return with what it actually was, and in many cases, it’s going to be different because life events change your household income. You may have gotten a better job, you have lost your job, gotten married, got divorced.
“All of those kinds of things impact the household income, then that impacts the amount of premium tax credit that you’re eligible for.”
Some will be taken aback if they have to repay the credit.
“When they were enrolling in the insurance, they thought of that as just a discount on their insurance premium,” Pickering said. “They didn’t think of it as this is something they might have to pay back if they got too much.”
Don’t expect too much help from the IRS.
Commissioner John Koskinen warned Congress that budget cuts could hamper taxpayer services this filing season.
Pamela Yip is a personal finance columnist for the Dallas Morning News.