The ACA and the Premium Tax Credit

The Affordable Care Act (ACA) has the potential to help millions of Americans secure health insurance. Many individuals are still confused about what the law does, how it will affect them and what tax credits and tax penalties they may face. Let’s have a look at what the ACA means for individuals and families. 

5 Important Facts about the ACA

ü  The ACA, passed in 2008, requires all Americans or legal residents to have health insurance or have a coverage exemption. The law created change in the health insurance industry by preventing insurers from dropping individuals or failing to provide coverage because of certain health conditions.

ü  All health plans must provide minimum essential coverage. They also must offer preventative services at no cost.

ü  The law does not make health insurance free, but it allows for tax credits that offset the cost for some individuals through a Premium Tax Credit.

ü  Created under the law, the health insurance Marketplace opens for a limited time and offers health care options to most individuals. This includes individuals who already have health insurance and want to compare costs.

ü  By 2016, businesses with 50 or more employees will be required to offer employee coverage options.

 How the ACA Affects You and Your Family

You must have health insurance or have a coverage exemption, or you will pay a tax penalty. You can keep your current health insurance plan, but if it is not a qualifying health plan, you can expect a penalty on your 2014 tax return. If certain services are excluded from your current insurance plan, research the minimum essential coverage that you must have to avoid a penalty on your taxes. For families with children, dependents can remain on their parents’ health insurance until age 26. Individuals can purchase health insurance even if they may have preexisting health conditions. If you have private insurance and are switching to Marketplace insurance, you can check with your in-network doctor to make sure that Marketplace insurance is accepted.

The Marketplace offers competitive pricing on insurance plans. Plan options can be viewed at www.healthcare.gov. Enrollment in Marketplace insurance opens once a year. For the 2014 tax year, the Marketplace will be open until February 15, 2015. The deadline is extended for individuals who encounter a life change, such as marriage or the birth of a child. If you are enrolled in Marketplace insurance and encounter a life change during the year, such as an increase or decrease in income, you must report this change in the Marketplace. Your Premium Tax Credit will be adjusted accordingly.   

 Only individuals who obtain coverage through the Marketplace are eligible for the Code Sec. 36B Premium Tax Credit. The U.S. Department of Health and Human Services (HHS) has reported that more than two-thirds of Marketplace enrollees are eligible for the credit and many enrollees have received advance payment of the credit.

All advance payments of the credit must be reconciled on the new IRS Tax Form 8962, which will be filed with the taxpayer’s income tax return. Taxpayers are required to calculate the actual credit they qualified for based on their actual 2014 income. If the actual premium tax credit is larger than the sum of advance payments made during the year, the individual will be entitled to an additional tax credit amount. If the actual credit is smaller than the sum of the advance payments, the individual’s refund will be reduced or the amount of tax owed will be increased, subject to a sliding scale of income-based repayment caps.  Certain individuals that previously were not required to file a tax return due to their income will be required to do so, due to the Premium Tax Credit reconciliation. 

The complications of the Affordable Care Act and the resulting Premium Tax Credit will be a challenge for many Americans as they find themselves seeking help to accurately prepare their 2014 tax returns.

Paul J Pascuzzi is an Enrolled Agent - a federally licensed tax practitioner who specializes in taxation. A local independent tax professional that’s proud to serving the Warren area since 1978.

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For those that owe

For taxpayers who owe taxes with their tax returns, the IRS has provided ten tips about how to pay:

1. Taxpayers should never send cash.

2. If taxpayers e-file, they can file and pay in a single step with an electronic funds withdrawal. If they e-file on their own, they can use their tax preparation software to make the withdrawal. If they use a tax preparer to e-file, they can ask the preparer to make their tax payment electronically.

3. Taxpayers can pay taxes electronically 24/7 on IRS.gov. Just click on the ‘Payments’ tab near the top left of the home page for details.

4. They can also pay by check or money order. They should make their check or money order payable to the “United States Treasury.”

5. Whether they e-file their tax return or file on paper, taxpayers can also pay with a credit or debit card. The company that processes their payment will charge a processing fee.

6. Taxpayers may be able to deduct the credit or debit card processing fee on next year’s return. It’s claimed on Schedule A, Itemized Deductions. The fee is a miscellaneous itemized deduction subject to the 2 percent limit.

7. Taxpayers should be sure to write their name, address and daytime phone number on the front of their payment. Also, they should write the tax year, form number they are filing and their Social Security number.

8. Taxpayers should complete Form 1040-V, Payment Voucher, and mail it with their tax return and payment to the IRS. They should make sure they send it to the address listed on the back of Form 1040-V. This will help the IRS process their payment and post it to their account. The form is available on IRS.gov.

9. The IRS reminds taxpayers to enclose payment with their tax return but do not staple it to any tax form.

10. For more information, call 800-829-4477 and select TeleTax Topic158, Ensuring Proper Credit of Payments. You can also get information in the instructions for Form 1040-V.

Thanks!

Thank you for the privilege of allowing us to provide you with year-round tax services. We are committed to providing you the highest quality of tax preparation and excellent service.

An Enrolled Agent!

Today, I passed the third of three examinations for the IRS Special Enrolled Agent designation ... the highest level recognition for tax practitioners. I'm thrilled to be a "Federally Authorized Tax Practitioner". EAs (Enrolled Agents) are the only federally licensed tax practitioners who specialize in taxation and also have unlimited rights to represent taxpayers before the IRS. 

Top Ten

Top Ten? I use to wait up to watch Late Night with David Letterman and his Top Ten.  I won’t suggest taxation and comedy are similar, at least not to most people. But certain tax rules are absolute, and ignoring them can bring consequences. These 10 rules are very important and are far from a laughing matter.

10. Everything is Income. The IRS taxes all income from any source, whether in cash or in kind. Lottery winnings? Taxed. Gambling winnings? Taxed. You name it, it’s taxed. If you win a car, you pay tax on its fair market value even if you don’t sell it. And offsets or deductions are rarely as inclusive as the income.

9. Forms 1099 Really Count. Those little tax forms you get in January are keyed to your Social Security number. Like a W2, the IRS always gets a copy. Pay attention to them—the IRS sure does.

8. Pay Taxes Later. Most tax planning involves timing. You want to accelerate tax deductions. Conversely, try to defer tax payments, subject to constraints such as the constructive receipt doctrine. Under constructive receipt, if you have a legal right to pay but say “pay me later,” it’s taxed now.

7. Reply to Every IRS Notice. Keep a good record and immediately contact your tax professional. Often, fighting the IRS is about attrition. But don’t fight over small tax bills. If you get a small tax bill, pay it. Don’t risk an audit or bigger dispute by fighting over small dollars.

6. Don’t Talk To the IRS if They Visit. If the IRS comes to your home or business, you have the right to decline to speak with them. Ask them to talk to your tax professional. Take their card and be polite but firm. Usually you can’t effectively represent yourself, and it’s not worth the risk that you’ll say the wrong thing.

5. Keep Records and Watch the Statute. The usual IRS statute of limitations is 3 years after you file your return. If you understate your income by 25% or more, the IRS gets 6 years. You can probably throw out most tax records after 7 years, but keep copies of your tax returns forever.

4. Avoid Amending Tax Returns. Amended returns have a high audit rate especially if they request a refund. The IRS says you “should” amend your return if you discover a mistake after it’s filed. However, the only time you really must amend is if you knew when you filed your original return that it was false. If you decide to amend, you can’t cherry-pick which items to fix. The amended return must correct everything, not just the items in your favor.

3. Don’t Explain or Attach Too Much. Timely file your tax returns even if you can’t pay. Payment can come later, and might be the subject of an IRS installment agreement. Penalties will likely be smaller if you file on time. Keep your returns concise. If an explanation or disclosure is needed, keep it succinct. Attachments to tax returns should be limited to tax forms and, where needed, plain sheets of paper listing additional deductions, income, etc. Don’t attach other documents.

2. Be Careful With Big Refunds. Getting a big refund can make your return stick out. Consider applying some of the refund to the current year’s tax payments rather than asking for the cash. You’ll have a lower profile with an initial or amended return.

And the number one tip to keep the IRS away …

Hire a Professional. The IRS Code is complex … handling taxes by yourself is usually a mistake. Even simple audits can go awry or extend into other areas if you aren’t careful. Whether you need practical advice about a tax refund too good to be true, about independent contractor vs. employee status, or why tax opinions are valuable, get some professional advice. And don’t wait until the last minute.

Paul J Pascuzzi is an accountant, a member of the National Association of Tax Professionals and holds a Masters in Finance. He has been an independent tax professional since 1978, proudly serving the Warren area at affordable prices.

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Get ready for tax season!