NEW YORK (MainStreet) — A major change to the 2014 Form 1040 resulting from the Affordable Care Act (ACA) – aka Obamacare – is the new refundable Premium Tax Credit.
The IRS describes the Premium Tax Credit is an “advanceable, refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance.” To qualify for the credit your household income – Modified Adjusted Gross Income (MAGI) and the MAGIs of all your dependents – must be between 100% and 400% of the federal poverty line for your family size.
This credit is only available to individuals who purchased coverage through the Obamacare Health Insurance Marketplace. If you otherwise qualify for the credit based on household income, but purchased your health insurance directly from an insurance provider, you are out of luck – you are not eligible for the credit.
When applying for coverage through the Obamacare Marketplace, you estimated your household income for the year to see if you qualified for a credit. If you did, you had the option of receiving an “advance payment” of the credit to apply against your monthly premiums, reducing your monthly “out of pocket.”
If you received advance payment of the credit during the year, when you file your 2014 tax return, you must reconcile the advance payments based on your estimated household income to the credit amount to which you are entitled based on your actual 2014 household income.
You calculate the Premium Tax Credit on new IRS Form 8962. If the advance payments received are more than the actual credit you are entitled to, you must pay back the excess on Line 46 of the 2014 Form 1040 or Line 29 of Form 1040A. If the credit determined on Form 8962 is more than the advance payments received during the year, you can claim the additional amount on Line 69 of Form 1040 or Line 45 of Form 1040A. The additional credit amount is refundable.
A pay back will reduce your refund or increase your balance due. An additional credit will increase your refund or reduce your balance due.
The Modified Adjusted Gross Income used to determine household income for the Premium Tax Credit starts with the same MAGI used in the calculation of the individual shared responsibility penalty - Adjusted Gross Income plus excluded foreign income from Form 2555 or 2555-EZ and tax-exempt income reported on Line 8b of the 1040 or 1040A – and adds nontaxable Social Security benefits (including tier 1 Railroad Retirement benefits). This is the excess of Form 1040 Line 20a over Line 20b, or Form 1040A Line 14a over 14b.
Individuals who purchased insurance through the Obamacare Marketplace will be sent new IRS information return 1095-A. This form reports information necessary to calculate the Premium Tax Credit – the insurance premiums charged, the advance payments received, and the premium amount of the second lowest cost “silver” plan offered by the Marketplace.
As with the individual shared responsibility penalty, because household income begins with your Adjusted Gross Income, you can increase the amount of your Premium Tax Credit by making, or increasing, a deductible IRA or self-employed retirement plan contribution.
The IRS has announced that it will not charge a failure-to-pay or an underpayment of estimated tax penalty based on the payback of excess advance premium payments as long as the return, or an automatic extension request, is filed on time.
If you receive a failure-to-pay penalty assessment, you should send the IRS a letter with the phrase, “I am eligible for the relief granted under Notice 2015-9 because received excess advance payment of the premium tax credit.” To avoid the penalty for underpayment of estimated tax, you must include a Form 2210 with your return. Mark checkbox A in Part II and include the phrase, “Received excess advance payment of the premium tax credit.”
One final note. Despite what you may hear or see in television, radio, or print ads, there is currently no such thing as an “ACA Tax Expert.” While a tax preparer may have taken extensive CPE in the tax aspects of ACA, as many have, we are all in the same boat, because this is the first year that Obamacare has impacted the tax return in these ways. No tax preparer out there has any real experience in applying these new rules to the preparation of Form 1040 or 1040A yet.
—Written by Robert D. Flach
Robert Flach has more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.