Jim Buttonow

Andrew Phillips
Be ready to answer these Affordable Care Act questions

Clients will have concerns about coverage, exemptions, the premium tax credit—and what it's all going to cost.

February 9, 2015
by Jim Buttonow, CPA/CITP, and Andrew Phillips, J.D.


Some key individual provisions of the Patient Protection and Affordable Care Act (PPACA) will be implemented this year, and your clients will likely have pressing questions regarding the tax ramifications of PPACA when you complete their returns this 2015 filing season. Be ready with the answers to these top questions.

1. Does PPACA apply to me?

In most cases, yes. This year, all Americans (other than certain narrow groups) must have minimum essential health insurance coverage or pay a penalty—unless they qualify for an exemption from the penalty. And all Americans, whether they must pay a penalty or not, are required to report health insurance information on their tax returns.

Most taxpayers are already covered by health insurance through plans provided by employers. The IRS estimates that between 70% and 80% of taxpayers will fall in this category. In that case, they’ll check the box on line 61 of Form 1040 to indicate that they had health insurance for all of 2014. For 2014, your clients will not be required to attach documentation or proof of insurance to their return.

Other taxpayers who are required to have minimum essential coverage will qualify for one or more of the nearly three dozen penalty exemptions available. The most common exemptions claimed will likely be for short coverage gaps and for hardships. In any event, if your client has an exemption, you’ll need to help him or her properly report the exemption on Form 8965, Health Coverage Exemptions.

This year, PPACA will most greatly affect taxpayers who obtained coverage through a Health Insurance Marketplace and are eligible to receive a premium tax credit to help pay for it. These taxpayers will receive a new piece of information required to complete their tax returns: Form 1095-A, Health Insurance Marketplace Statement.

2. How will this affect my refund?

About 80% of taxpayers receive a refund, and the average amount is about $2,800. As a result, the top questions taxpayers will have about PPACA will likely concern their refunds.

PPACA will affect refunds for two groups of taxpayers:

Group 1: Taxpayers who are insured and are eligible for the premium tax credit.

Many taxpayers who purchased insurance through the Health Insurance Marketplace also qualified for the premium tax credit—a refundable credit that helps taxpayers cover the cost of their health insurance. Eligible taxpayers can receive advance payments of the premium tax credit in the form of monthly payments sent directly to their health insurance company throughout the year, rather than claiming the entire credit when they file their income tax return. This reduces the amount of the premiums these taxpayers must pay out of pocket during the year. In 2014, more than 6 million taxpayers chose to receive advance payments of the premium tax credit.

On 2014 returns, taxpayers who opted for advance premium tax credit payments will be required to “reconcile” these payments against the actual premium tax credit that they are eligible for. Reconciliation is necessary because the taxpayer’s advance payment amounts are based on projected income, family size, and filing status for the year, determined at the time of enrollment in an insurance plan in the Marketplace—while his or her actual premium tax credit amount is calculated based on his or her actual circumstances for the year.

After reconciliation, the effects on your client’s refund will become clear:

  • If your client received more in advance premium tax credit payments than the amount of his or her actual premium tax credit, your client will owe the excess amount in taxes (up to a limit), meaning a reduced refund or a balance due. However, the IRS has announced that, for 2014, it will not impose failure-to-pay or estimated tax penalties that would otherwise be due because of excess advance premium tax credit payments (see Notice 2015-9).
  • On the bright side, if your client is eligible for a larger premium tax credit than the total of the advance premium tax credit payments received throughout the year, your client can claim the difference as a credit on his or her return. This would increase your client’s refund or reduce the amount owed.

Group 2: Taxpayers who owe an individual shared-responsibility payment because they didn’t buy health insurance or qualify for an exemption.

To collect this penalty, the IRS’s only recourse is to offset it against all or part of a taxpayer’s refund. If your client owes an individual shared-responsibility payment, advise him or her that the IRS can offset the amount against any future tax refunds or credits, and that interest will accrue on the unpaid amount. 

3. I didn’t have insurance. What’s it going to cost me?

That depends on whether your client qualifies for a coverage exemption (i.e., he or she qualifies for an exemption from the requirement to obtain minimum essential coverage) or qualifies for an exemption from the tax penalty. If your client qualifies for a coverage exemption based on his or her circumstances, your client won’t owe an individual shared-responsibility payment but will have to file Form 8965 with his or her return to report the coverage exemption he or she is claiming.

A taxpayer can claim some of the coverage exemptions on his or her tax return but must apply for others through the Health Insurance Marketplace.

Exemptions that can be claimed on the tax return include:

  • Coverage gaps for a continuous period of less than three months;
  • Exempt noncitizens;
  • Unaffordable coverage options costing more than 8% of household income.

Exemptions that must be applied for through the Marketplace include the hardship exemption to the penalty. This applies to individuals who experienced a hardship that prevented them from obtaining coverage. These include, for example, individuals who:

  • Were homeless, faced an eviction or foreclosure, or had their utilities shut off during the year;
  • Experienced the death of a close family member;
  • Were victims of domestic violence;
  • Filed for bankruptcy in the previous six months.

Clients applying for a coverage exemption through the Marketplace must submit an application through the Marketplace and attach documentation. If the client’s application is approved, he or she will receive an exemption certificate and approval letter in the mail. Your client’s return must include the exemption certificate number.

If your client doesn’t qualify for a coverage exemption, your client will owe the individual shared-responsibility payment, which is calculated using the instructions on Form 8965 and entered on the return. A common misconception is that in all cases this penalty amount is a flat $95 for 2014. In reality, the penalty amount is calculated using a complex formula that takes into account taxpayer income. The result will often be a substantially higher penalty that could be hundreds of dollars. The penalty amount is set to increase over the next three years and will be adjusted for inflation going forward.

4.  Is my return preparation fee going to increase?

If your client has obtained health insurance coverage from the Marketplace, generally, your client’s fees will go up because you’ll be filing additional forms and spending more time on the return. Your clients may have heard that PPACA will affect their taxes, but you should also practice upfront communication on how it will affect their fees.

Be prepared for the most pressing client questions that will inevitably come up this filing season. Your clients will look to you as their PPACA expert and trusted tax adviser.

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Jim Buttonow, CPA/CITP, directs tax practice and procedure product development at H&R Block. Andrew Phillips, J.D., LL.M., is director of Tax Research at The Tax Institute at H&R Block, which provides analysis on the legislative, regulatory, and judicial tax world.