What the Affordable Care Act Means for Taxpayers in 2015

Nearly five years after the passage of the Affordable Care Act, the law’s individual mandate — and its related penalty — are becoming a reality for taxpayers. 

This year’s heavily anticipated tax season marks the first time U.S. residents will have to report their health insurance status and face a penalty for failing to obtain coverage. Those who qualify for one of the ACA’s numerous coverage exemptions will have to navigate a complex application process, while others who purchased coverage through a state or the federal health insurance exchange will have to complete a new tax form.

“This is the largest change we have seen to the tax code in 20 years,” Sue Ellen Smith, a tax specialist at H&R Block, told California Healthline.

So, who specifically will be affected?

The majority of taxpayers — about 75% — are expected to be able to simply check a box on their tax return stating that they had minimum essential coverage under the ACA for all of 2014. Such coverage includes most employer-sponsored coverage and retiree plans, Medicare, Medicaid and the Children’s Health Insurance Program.

The other 25% of taxpayers — those who purchased coverage through the exchanges and those who remained uninsured — will have some additional paperwork to complete.

Let’s take a closer look at how the tax code changes affect the latter population.

Health Insurance Exchange Coverage

The estimated 6.7 million U.S. residents who purchased coverage through a state or federal health insurance exchange will receive a Health Insurance Marketplace Statement — Form 1095 A — from the exchange by early February.

Debra Hammer, senior communications manager at TurboTax, in an email to California Healthline said that consumers will report the information on this form just like they would enter their W-2 information.

The estimated 85% of exchange enrollees who received a federal subsidy to help offset the cost of coverage will need to complete an additional process called reconciliation. This process will determine if they owe money to or are owed money from IRS, as the subsidies they received were based on their 2013 income, which may have changed in 2014.

The Uninsured

Individuals who were uninsured in 2014 could face penalties ranging from $95 up to $2,448 for an individual and up to $12,240 for a family of five. TurboTax estimates that the average penalty for this year will be $301.

“And if they do not take action now and enroll in coverage for 2015, the penalty will rise to 2% of their income,” according to Smith.

However, Hammer said about half of the 40 million U.S. residents who were uninsured in 2014 will qualify for an exemption, including hardship exemptions, under the ACA — which might be easier said than done.

Who Qualifies for Exemptions?

Under the ACA, taxpayers who were uninsured for part or all of 2014 could qualify for one of the law’s many exemptions, including hardship exemptions, such as being homeless or not lawfully present in the U.S.

However, Kristin Esposito, senior technical manager at the American Institute of Certified Public Accountants, told California Healthline that the exemption form has “quirks” and that there are two different avenues to apply:

  • Directly to IRS through the 8965 form; and
  • By submitting an application to the exchange.

For example, consumers who were unable to find affordable coverage — costing no more than 8% of their household income — must apply to IRS, while some hardship exemptions will go through the marketplace.

Esposito said that U.S. residents can determine what group they fall into through the marketplace, form 8965 and IRS.

If they were applying through the marketplace, consumers had to fill out and mail in a form by Dec. 31, 2014, according to Smith. In some cases, consumers needed to include materials supporting their applications, such as medical bills, notification of utilities being cut off and police reports to establish hardships. Consumers who are approved will be mailed an exemption number that they can enter on their tax form, while those who are declined can appeal the decision.

Because the process is done manually it could take several weeks. Esposito said that IRS is allowing individuals who are waiting for the marketplace to process their paperwork to write “pending” on their tax forms to avoid missing the April 15 deadline to file.

Spreading the Word

Consumer advocates and tax experts say they expect some confusion this year, as consumers and tax preparers navigate the new system.

Esposito said, “I think this tax season will be a bit of a bumpy road for taxpayers and CPAs; anything new causes concern.”

Cheryl Fish-Parcham, private insurance program director at Families USA, told California Healthline that her organization is encouraging consumers to verify all of the information on their forms, including enrollment dates and making sure federal subsidies match those included on their bills.

The biggest hurdle could stem from a simple lack of awareness about the tax changes. Hammer pointed to a recent TurboTax Health Survey that found 48% of U.S. residents did not know they would have to report their health insurance status this year. What’s more is that the survey showed 56% of uninsured individuals were unaware that they could qualify for exemptions from the penalty, meaning many individuals could end up paying more in taxes than they should.

To help boost awareness and reduce confusion, HHS and the Department of the Treasury announced an initiative that would provide consumers with online resources about the changes to this year’s tax filing process, as well as community outreach and partnerships with tax preparers.

Esposito said, “To prepare for ACA changes the AICPA has offered its members webcasts, including some by IRS.” She added, “We recommend our members read up on forms, start early, and learn early … and to not go into this tax season cold.”

Several tax service companies, such as H&R Block and Jackson Hewitt, have online resources and tools dedicated to the new law. TurboTax offers consumers an exemption check tool that allows consumers to see if they qualify for an exemption and how to apply.

Further, Jessica Kendall, director of enrollment assister network at Families USA, in an interview with California Healthline, said several states are launching efforts to help enrollment assisters who have built relationships with consumers connect them with tax experts.

Consumers might want to take advantage of these outside initiatives to avoid any delays in contacting IRS directly. In a recent speech, IRS Commissioner John Koskinen said that because of budget constraints, the agency likely will be able to answer just more than half of the phone calls it receives. He added that many consumers will get a “courtesy disconnect.”

Around the nation

Here’s what else is making news on the road to reform.

Bipartisan struggles. Modern Healthcare reports that Senate Republicans are struggling to convince Democrats to support of a bill that would change the definition of full-time employees under the ACA’s employer mandate.

ED visits on the rise. A Modern Healthcare analysis finds that emergency department visits increased sharply at the 24 busiest hospitals in 2013, with several reporting higher volumes in 2014 despite a decline in uninsured individuals following the implementation of the ACA.

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