If you’re one of the 8 million Americans who enrolled in a new health insurance plan through the marketplace during the initial enrollment period, then you probably have questions about your taxes for this year. Likewise, those without insurance will wonder how the penalty fee will affect their returns. With tax season right around the corner, it’s easy to get tangled in the numbers. To make things easier, we’ve outlined some of the ways that individuals and families will be affected by health insurance during the 2015 tax season.
The Individual Mandate
One of the key provisions of the Affordable Care Act is the individual mandate, which requires all eligible American citizens to obtain minimum essential health coverage or face a fine for non-compliance. This mandate makes the ACA work because it coerces participation and ensures that the system is paid for through taxes. Unfortunately, many Americans chose not to participate in the system last year, and this year launches the beginning of the individual mandate’s penalty provision.
In 2014, individuals will pay the greater of $95 or 1 percent of their income if they didn’t have insurance last year. The penalty is applied to every month that an individual lacks qualifying insurance. The penalty will not exceed the average cost of a bronze plan on the marketplace, which was $2,448 per individual in 2013. For families, the penalty fee is based on the number of people in the household without insurance. Families of four, then, would pay $95 per adult and half that amount per child at the flat rate.
Penalty fees can add up. The cap on a family of five in 2014 is $12,240, which is a substantial burden for an average family even if that family earns a decent income. Many Americans chose to avoid buying health insurance on the premise that the penalty fee would be lower than the cost of premiums. In reality, premiums offer benefits while penalties just cost money.
In 2015, the penalty fee will increase substantially to $325 per individual or 2 percent of their adjusted gross income. In 2016, the fee jumps to $695 or 2.5 percent of an individual’s income. After 2016, the penalty will be adjusted for inflation.
Not only will people who avoided health insurance need to rethink their taxes this year, but those who took advantage of advance premium tax credits might also need to complete some extra paperwork. Approximately 85 percent of enrollees on the marketplace used government subsidies to offset the cost of their health insurance premiums. If you used a subsidy in 2014, then you need to be prepared to support your claim of income in the upcoming tax season.
The IRS will compare your existing tax records to what’s being filed this year as well as the dollar amount of subsidies you received. If you overestimated your income, then you’ll receive a portion of that tax credit back on your return. Those who aren’t getting a return will have the excess applied to what they owe. If you underestimated your income, then you’ll owe the difference in subsidy award back to the government. This amount can be deducted from your refund.
There is a cap on how much you’ll have to pay back if you underestimated your income in 2014. However, if your estimate was so far off that your income now places you beyond 400 percent of the federal poverty limit, which means you no longer qualify for subsidies, then you’ll have to pay back the entire amount of the subsidy.
Help from the Professionals
This year, you may want to consider speaking with a tax professional to go over your return if you have doubts about your health insurance status. If you’re sure about your return, then you can use tax preparation software like TurboTax to calculate your taxes in relation to health insurance. Software companies and other sites are offering step-by-step instructions for people with difficult tax situations, but you might benefit from an in-person analysis.
Earlier this month, tax professionals at H&R Block offered free assessments for people who were concerned about how health insurance affected their returns, and you may be able to find similar services in your community. Don’t underestimate the benefit of talking to a pro. You might have to pay for the service, but the initial cost could prevent you from undergoing an audit. Plus, you may be able to deduct the cost of tax preparation service from your taxes.