Obama Care Adds New Levels Of Complexity To The Tax Return

The insurance mandate, along with its low-income subsidies available from the insurance marketplaces and penalties for not being insured, is going to involve a massive amount of information reporting that must be fed into the tax return by the preparer. So get yourself a white smock, because you are now part of the U.S. health care system!

Preparers need to know if the client is insured, and if so with whom (an employer, a government plan, the insurance Marketplace or private insurance). The preparer also needs to know if the insurance plan meets Affordable Care Act (ACA) minimum essential coverage requirements and how many months the family members were covered in order to avoid the penalty for not being insured.

If the client qualifies for and has acquired subsidized insurance through the insurance Marketplace, then things get a bit more complicated. Here, the practitioner also needs to know the amount of subsidy the family received in order to reconcile the subsidy with the premium assistance credit.

To fully understand the magnitude of the problem, one needs to understand that everyone who has ACA qualified insurance will receive at least one additional informational return that must be included in the tax return because everyone must prove he or she had appropriate insurance or be subject to a penalty.

To make matters worse, the more serious complications will deal with lower-income taxpayers who qualify for the premium assistance credit and who normally file relatively easy returns. Computing their household income and premium assistance credit and then reconciling the credit with the advance Marketplace subsidies could rival preparing a 1031 exchange.

Practitioners will also need to consider how their lower-income taxpayers are going to pay for the extra tax return complications…  

Several of the informational forms that will be used provide the data needed to prepare returns along with the form that will be used to compute the premium assistance credit have become available in draft form on irs.gov. Here is an overview of those new forms:

  • 1095-A – Health Insurance Marketplace Statement – This informational return will provide the most complicated set of information. In addition to listing family members who were covered, it also lists the following information by the month.
  • Whether or not the employee was offered insurance
  • The employee’s share of the insurance cost
  • List of family members covered by insurance
    • Monthly premium amount
    • Cost of equivalent second-lowest silver coverage
    • Amount of the subsidy (advance premium assistance credit)
  • 1095-B – Health Coverage – If the taxpayer is covered by insurance other than through an employer or the marketplace, this informational return will tell which members of the family were covered by a qualified policy and for which months in the year.
  • 1095-C – Employer Provided Health Offer and Coverage – This informational return, which is required to be prepared by large employers with respect to their full-time employees, will provide the following information by the month:

The employee may be issued a copy of the 1095-C or the employer may furnish a substitute statement—or even an electronic statement instead—with the employee’s consent.

  • 8962 – Premium Tax Credit – This is the form that will be used to compute the premium assistance credit and reconcile the credit with the advance subsidy.

But wait; there may be additional problems. The IRS, in Notice 2013-45, let both employers and insurance companies off the hook when it came to using the official forms in 2014. Apparently four years (the ACA was passed in 2010) was not enough time for the IRS to develop forms for 2014 computerized reporting. As usual, that puts the burden on employers and insurance companies to come up with substitute reporting plans and imposes additional burdens on the preparers interpreting those substitute forms.

On the bright side, the coming filing season presents outstanding opportunities for practice growth. This added complexity would frazzle even the most ardent self-preparer, causing them to seek professional assistance.

Are you ready?

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