We’ve discussed for months the rules and regulations of Obamacare and how to stay in compliance to avoid paying fines. If you listened to us (and we hope you did), you might think that this year’s tax filing will be smooth sailing. In some ways, it may be; federal tax filing season kicked off last Tuesday without any real major delays. But Obamacare presents some tough challenges for taxpayers -- both individual and business filers. Here, I'll focus on individuals since those are the ones most likely to be impacted this year. You can brush up on the business requirements here. Remember the employer mandate was delayed several times.
First, let’s remind ourselves why this is all such a big deal. The Affordable Care Act -- Obamacare -- is part health law, part tax law, and the IRS plays a far more important role in enforcing the law than anyone ever thought it would. Because of that, extra tax forms, questions, and some fairly complicated math are all now part of the “routine” of filing taxes. Now, not every taxpayer will face a complicated scenario. If you have insurance through your job, or through other programs like Medicaid, Medicare, or Cobra, you will have to do little more than check an extra box on your tax return.
Here’s where things get tricky:
You received a subsidy.
The majority of Americans who bought insurance on the exchanges last year received subsidies to help lower their insurance costs. Presumably, they made decisions based only on what their monthly payments would be, without knowing what kind of discount they were getting. Come tax filing time this year they’ll find out, and may be faced with the reality of paying part of it back. Subsidies were calculated based on income stated on 2012 tax returns, the most recent documentation available at the time. If income has increased since then, a part of the subsidy may have to be paid back. If income has decreased, beneficiaries may be owed a bigger subsidy and see the difference added to their tax returns.
Note: If you did receive a subsidy, keep your eye out for form 1095-a, a form that should lay out just how much you received in a premium tax credit.
You didn’t have coverage.
If you didn’t carry health insurance last year and were not exempt from needing it you’ll have to pay a penalty this year. The fee amounts to $95 per person or about 1% of your household income. (And the fee is jumping to $325 per person, or about 2% of household income, this year). Form 8965 can help you figure out what you owe.
If you do owe, the fee can be added to your tax bill or subtracted from your refund. The strange thing here is that the IRS won’t have as much authority when it comes to collecting the penalty as it does for collecting other tax liabilities (tax liens on property, for example). People who don’t pay are not subject to criminal charges, so the impending doom is pretty light here. The money can be added to future tax bills, so if you don’t pay now, it will likely catch up with you.
You are dishonest.
Some people who didn’t have insurance and were not exempt may be tempted to lie and say they did to avoid being slapped with the penalty. They might get away with it, too. Many employers are not yet required to report information to the IRS about which employees have insurance, and the IRS isn’t asking for proof from individuals either. So it’s really, really tempting to lie, right?
Wrong. The IRS has a tricky way of figuring things out later (hello, audit), and could come back and ask for proof of health insurance coverage just as it does when questioning other credits, deductions, or claims about income. And next year, when more companies are reporting information to the IRS, lying about coverage will get hard. Honesty is the best policy here.
You did everything absolutely right.
Here’s the bottom line on Obamacare: it’s an absolute nightmare for the IRS, an agency which is already stretched extremely thin. Lack of personnel at the IRS, vague regulations, additional forms, and absolutely no one who has any experience dealing with tax filing under Obamacare makes for a pretty bleak tax season. Even if you did everything right, expect longer wait times if you call the IRS (if you get through at all), longer processing times, and a possible delay on your return this year.
This is going to be a very interesting tax year. My best advice to you is to begin preparing your return even if you haven’t yet received all the forms you’ll need. For many of you, income information, child tax credits, and other tax information hasn’t changed since last year. Getting things in order soon will give you the extra time you need to resolve any issues that come up, especially since the IRS may take longer to send out letters requesting documentation.
