W-2s and 1099s for 2014 will soon be arriving in the mail. So it’s not too early to start thinking about putting together your Form 1040 for last year. For 2014, there are only two important federal income tax changes for individual taxpayers (beyond the usual inflation-indexing of tax rate brackets and various other tax parameters). Both changes have to do with Obamacare. Here’s what you need to know at tax preparation time.
Obamacare: Penalty for failure to carry ‘minimum essential coverage’
The Patient Protection and Affordable Care Act – also referred to as Obamacare – established a new federal income tax penalty for failure to carry so-called “minimum essential coverage.” Last year was the introductory year for the penalty, which can potentially be owed for any month when qualifying health coverage was not in force. (In IRS-speak, the penalty is called a “shared responsibility payment.”)
You don’t have to worry about the penalty if you (and all members of your family, if applicable) had qualifying coverage for all of last year. In this case, simply check the box on line 61 of Form 1040, and you’re done.
If you did not have qualifying coverage for the entire year, the first task is to determine if you are exempt from the penalty. For that, see the instructions for new IRS Form 8965 Health Coverage Exemptions (and instructions for figuring your shared responsibility payment). If you were exempt last year, file Form 8965 with your 2014 Form 1040 to prove it. For additional information on exemptions, see IRS Publication 5187, Health Care Law: What’s New for Individuals and Families. Both Form 8965 and Publication 5187 can be accessed at irs.gov.
If you were not exempt, the next step is to calculate the penalty amount that you owe using the worksheet in the instructions for Form 8965. Enter the penalty amount on line 61 of your return. For 2014, the penalty can range from $95 or less to a good deal more for higher-income folks. Also, be aware that the penalty for 2015 and beyond can be much higher than the penalty for last year.
Obamacare: Premium assistance tax credit
The other Obamacare change for 2014 was the debut of the so-called premium assistance tax credit (PTC in IRS-speak). It is available to eligible individuals and families who obtain health coverage in a qualifying plan by enrolling through a state-run insurance exchange or the federal exchange (healthcare.gov).
In general, you are eligible for the PTC if your household income was between 100% and 400% of the federal poverty line and you did not have access to affordable employer-sponsored coverage last year. The allowable credit amount can vary widely depending on your specific circumstances. For additional information on the PTC, see IRS Publication 974, Premium Tax Credit.
The PTC can be advanced directly to the insurance company to lower your monthly premiums or it can be claimed when you file your return. You may not know the exact amount of your allowable PTC for last year until you file your 2014 Form 1040. Calculate the PTC using the new IRS Form 8962, Premium Tax Credit. Taken together, Form 8962 and its instructions add up to a daunting 17 pages. Enjoy!
If advance PTC payments were made on your behalf last year, the amount of those payments should be reported by the exchange to you on the new Form 1095-A, Health Insurance Marketplace Statement. You should receive Form 1095-A by no later than early February. Then calculate the difference between your advance PTC payments (if any) and the PTC amount you are entitled to claim on Form 8962. Enter any excess PTC amount on line 46 of Form 1040 and pay it when you file.
Finally, you should know that the PTC is a so-called “refundable credit.” That means you can collect the full allowable credit amount even when it exceeds your federal income tax liability for last year. Specifically, the PTC amount is first used to reduce your federal income tax bill. After your bill has been reduced to zero, any remaining PTC can be either refunded to you in cash or used to make estimated tax payments for the 2015 tax year.
Obamacare: The bottom line
The good news is there were very few changes to the 2014 Form 1040, compared with the 2013 version. The bad news is the two Obamacare-related changes are very complicated. You may need to hire a tax pro to sort things out. The other bad news is that the Supreme Court may decide to disallow the PTC for folks who got their coverage through the federal exchange. (See The year’s biggest tax stories.) However, if that happens then some sort of accommodation will probably be reached for folks who relied on collecting the credit for last year. Stay tuned. I’ll keep you posted.