It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, you won’t want to miss it.
A is for Affordable Care Act reporting.
In January of this year, President Trump signed an executive order giving federal agencies the authority and discretion to roll back certain aspects of the Affordable Care Act (ACA or Obamacare). It was unclear at the time what that might mean for the Internal Revenue Service (IRS) which is tasked by Congress with enforcement of several key components of ACA, including the individual mandate. The following month, I reported that the IRS appears to be easing off of enforcing the mandate. Specifically, the IRS made it clear that returns will not be “systemically rejected by the IRS at the time of filing.” Then, in March, the GOP showed its hand by revealing its plan to repeal and replace Obamacare. Included in the plan was an end to the requirement that individuals buy health insurance or pay the penalty (the shared responsibility payment) as well as a repeal of several tax-related provisions. The individual mandate would, if made law, be retroactive to January 1, 2016 (yes, 2016), which would affect the tax return that you will file this tax season, in 2017.
The result? A lot of taxpayer confusion. It may even explain why tax season is off to a slow start: millions of taxpayers who filed by this time last year haven’t filed in 2017. Taxpayers aren’t sure what to do. But here’s what you need to know: Nothing has changed. Nope, nothing. Zilch. Nada.
It’s clear that things are changing and that will impact your tax return eventually. But for now? You’ll continue to report as if you would have at the end of the tax year. The IRS even has a reminder on its website, that says, among other things:
Taxpayers should continue to file their tax returns as they normally would.
So here’s how that breaks down:
Two of the most talked about taxes in Obamacare, the Medicare surtax, the Net Investment Income Tax (NIIT), are still in play for 2016 (and likely 2017). That means the 0.9% Medicare tax on a taxpayer’s earned income over $200,000 for single taxpayers ($250,000 for married taxpayers) is still applicable. Ditto the additional 3.8% tax on interest, dividends, rent, royalty and passive business income on single taxpayers making more than $200,000 ($250,000 for married taxpayers). That income still gets reported, and the tax is payable.
- If you are subject to the Medicare surtax, you’ll file form 8959, Additional Medicare Tax (downloads as a PDF), together with your form 1040.
- If you are subject to the NIIT, you’ll file form 8960, Net Investment Income Tax-Individuals, Estates, and Trusts (downloads as a PDF), together with your form 1040.
What about those premium tax credits? For now, those are still on the books, too. If you qualify for credits or subsidies, you must file a tax return in 2017 to reconcile the advance payments received in 2016. If you received advance payments in 2016 and fail to claim the premium tax credit on a federal tax return, this could bar you from receiving additional advance payments. In other words, if you received health care tax credits or subsidies and you want to continue to receive those health care tax credits or subsidies, you are still required to file your federal income tax returns even if you would normally be exempt. Failure to file means you will be responsible for the full cost of your health care insurance and you may be asked to repay some or all of the 2016 advance payments of the premium tax credit.
You’ll report information about your premium tax credits (more on those here) on your form 1040 as follows:
- Line 46: Enter advance payments of the premium tax credit that must be repaid
- Line 69: Report net premium tax credit if the allowed premium tax credit is more than advance credit payments paid on your behalf
* Remember that form 1040EZ cannot be used to report advance payments or to claim the premium tax credit.
Finally, what about the shared responsibility payment? This is where things get tricky. Under the ACA, you’re required to demonstrate that you have “essential minimum coverage.” You’re considered covered if you have insurance through the government, including Medicare, Medicaid, CHIP, retiree coverage, TRICARE, or VA health coverage; private insurance that you purchased on your own including COBRA coverage and coverage obtained through the Health Insurance Marketplace; or provided by your employer (even if you didn’t pay anything for the coverage). Most taxpayers – about 130 million or so – will report coverage.
The quick and easy way for most taxpayers to indicate that they have coverage is to tick the box on line 61 on page 2 of their individual income tax return.
If you are not required to file a tax return in 2017, you are considered exempt from the shared responsibility payment, and you do not need to file to claim the exemption. It’s important to remember that failing to file a tax return or owing taxes won’t disqualify you from obtaining coverage through the exchanges.
- If you’ve been granted an exemption from the shared responsibility payment by the Marketplace, you’ll report that exemption at Part I on form 8965.
- If you’re claiming an exemption because your household income or your gross income is below your filing threshold, you’ll report that at Part II on form 8965. Remember that if you don’t have to file a return in the first place, you don’t need to worry about this step.
- If you’re claiming any other kind of coverage exemption, you’ll report that at Part III on form 8965.
- If you don’t qualify for an exemption, use the Shared Responsibility Payment Worksheet (found in the form 8965 instructions) to figure your payment. For the 2016 tax year, that payment is equal to 2.5% of your adjusted gross income (AGI), or $695 per adult and $347.50 per child, up to a maximum of $2,085, whichever is higher. Report that amount on the same line where you DIDN’T check the box earlier (line 61 on form 1040). Attach form 8965 to your tax return.
None of that has changed as of 2017. But here’s what is changing: in years past, failure to tick the box at line 61 could have resulted in a kickback of the tax return. The IRS has indicated that for 2017, it will accept and process tax returns where a taxpayer is silent on coverage. That doesn’t mean, however, that might be the end of it. If you don’t report coverage, the IRS could approach you later for more information – and payment. According to the agency, “when the IRS has questions about a tax return, taxpayers may receive follow-up questions and correspondence at a future date, after the filing process is completed. This is similar to how we handled this in previous years, and this reflects the normal IRS post-filing compliance procedures that we follow.”
But will they? I’m not a betting (tax)girl. But I am a numbers girl. IRS Commissioner John Koskinen told Congress that 80% of taxpayers indicated on their returns last year that they had qualifying coverage all year; in addition, nearly 13 million taxpayers, or about 9% of taxpayers, claimed one or more health care coverage exemptions. That leaves a maximum of about 10% of taxpayers who might be on the hook for the payment. And If I were choosing where to put my resources, I don’t know that I’d throw them at making people report and pay a tax that likely won’t be around next year.
Add to that? There are no teeth for IRS to enforce lack of payment. As I noted in 2015: there are practically no real consequences for not paying the penalty. By law, you have to pay the penalty – but if you don’t, you won’t go to jail, you won’t be liened, and you won’t be levied for collection.
What can the IRS do if you don’t pay? They might seize any part or all of your refund to satisfy your obligation. And maybe you’ll get some letter writing and virtual shaking of the government’s fist at you. Maybe even some blustering, for good measure. Otherwise, there’s not a whole lot there if you opt out. Not that you heard it from me.