The tax filing season is kicking off without any major delays. But some taxpayers will still find it more frustrating than usual.
Along with marking their income and filing status, taxpayers will now have to say on their tax returns whether they did – or did not – have health insurance last year. Those who received insurance subsidies or who went without insurance altogether are also going to face new forms, additional questions and some complicated math.
“The Internal Revenue Service, in addition to being a tax collection agency, is now a health-care agency,” said Michael Greenwald, an accountant and partner with Friedman LLP.
It won’t be complicated for everyone. The millions of Americans who are covered through their jobs, or who have insurance through other programs such as Medicaid, Medicare or Cobra, will have to do little more than check an extra box on their tax returns.
“If you didn’t purchase [insurance] on a marketplace and did not get a subsidy, you’re pretty much done,” said Jeffrey Porter, an accountant with Porter & Associates. “But if you did, you’re going to have to go through a pretty complicated calculation.”
Here’s where things could get tricky.
• If you got a subsidy for health insurance premiums: Most Americans who bought insurance on the exchanges for 2014 received subsidies that helped lower their insurance costs. Many focused only on what their monthly payment would be, without knowing what kind of discount they were getting. But come tax time, people will find out just how much of a subsidy they received – and if they have to pay part of it back.
The complication comes from the fact that many people applied for health insurance at the end of 2013 or beginning of 2014 using their 2012 tax returns – the most recent paperwork they had at the time. If they saw a big raise after that, they may have to pay back some of the subsidy they received. If they made less than expected, they may be owed a bigger subsidy and see the difference added to their tax refunds.
As they wait for their W-2, 1099 forms and other income paperwork, people who received subsidies should also keep an eye out in the mail for the 1095-A, a form that should lay out just how much they received in a premium tax credit. They’ll need the document to file their tax returns. Taxpayers should try to avoid surprises by reporting changes in income to the marketplace as they happen, says Kathy Pickering, director of the H&R Block Tax Institute.
• If you didn’t have coverage: If you didn’t have insurance in 2014 and you weren’t exempt from needing to have coverage, you’ll have to pay a penalty this year. Figuring out just how much you owe can get complicated. The fee amounts to $95 per person or about 1 percent of your household income, whichever is greater. (For 2015, the fee is jumping to $325 per person or about 2 percent of household income, again whichever is greater.)
The penalty is charged on a monthly basis, so you would owe a fraction of the fee for every month that you or your family went without coverage. There was also a grace period: You were allowed to go up to three months without insurance before the penalty kicked in. The worksheet in the instructions for Form 8965 can help you do the math.
The fee could be added to your tax bill or subtracted from your tax refund, but the IRS won’t have as much authority when it comes to collecting the penalty as it does for collecting other tax liabilities.
For instance, the agency won’t be able to put a lien on your property if you don’t pay up, as it can with other tax bills. People who don’t pay also can’t be subject to criminal charges. But the money could be added to future tax bills, so if you don’t pay now, you may have to pay eventually.
Some people may also avoid paying the penalty if they qualify for one of the 33 exemptions allowed. For instance, people who were in jail last year won’t have to pay. Neither will those who make so little they’re not required to file a tax return. Some people will qualify for religious exemptions.
• If you abuse the honor system: There’s one more thing tax pros are warning about. Some people who didn’t have insurance and who weren’t exempt may be tempted just to say they had insurance to avoid paying the penalty. Because many employers are not yet required to report information to the IRS about which employees have insurance, some people might get away with it.
But just as it can when it has questions about income or about whether a taxpayer really qualifies for a certain credit or deduction, the IRS could come back and ask for proof later. And next year, when more companies are reporting insurance information to the IRS, lying about coverage will get harder.
“Everything you put in your tax return is something that they’re trusting that you’re telling the truth,” Porter said. “And of course if they audit you, you will have to prove it.”