Doing your taxes is hard enough without having to deal with new and complicated tax laws that add extra work to the tax-preparation process. Yet as the new tax season gets underway, government officials expect that nearly three in 10 American taxpayers will need to deal with new provisions of the Patient Protection and Affordable Care Act, better known as Obamacare. As you can imagine, the prospect of even more tax complexity is throwing many taxpayers into a panic, and opponents of the healthcare law cite the tax requirements as yet another reason to repeal the law.
Yet, regardless of Obamacare's future, you'll need to know how to deal with its tax aspects on your 2014 tax returns. Fortunately, although the latest news from the government might sound scary, dealing with new forms and other requirements under Obamacare doesn't have to be as frightening as many people think. Below, we'll take a look at how you'll need to react to Obamacare on your taxes, and give a few tips on making the whole process easier.
The new normal for your taxes
Late last month, the Obama administration released official estimates of how many taxpayers would have to take Obamacare provisions into account on their tax returns. The total was alarming, as officials expect Obamacare to affect as many as 29% of all taxpayers. With projections for 150 million income tax filings this year, that equates to 43.5 million American taxpayers.
Breaking the projections down, between 10% and 20% of taxpayers will need to take steps on their returns to claim their exempt status from the healthcare law's provisions. Another 3% to 5% will have to use forms in order to match up what they received in advance federal subsidies with what they were entitled to receive, given their actual income for the year. And finally, between 2% and 4% will have to pay penalties for not having qualifying health-insurance coverage under Obamacare.
It's natural to panic when you find out you'll need to deal with a brand-new tax form. But if you keep a few things in mind, it will make dealing with Obamacare's tax provisions at least a bit easier. Let's look at the three most common scenarios:
1. You're exempt from health coverage requirements.
Claiming exemptions can be pretty straightforward. Form 8965 [opens PDF] addresses how those who qualify for health-coverage exemptions can alert the IRS of that fact and avoid penalties. Many people get exemptions from the Marketplace, and all they have to do is fill in the information the Marketplace gives them.
Meanwhile, those claiming exemptions for the first time fall into two basic categories. Those for whom health insurance isn't affordable have a specific code to enter, while those who earn so little that they don't have to file a tax return at all check the boxes pertaining to income levels. Although calculations can be arduous, they boil down to whether your coverage would cost you more than 8% of household income after taking any subsidies into account. Other exemptions have their own codes for which calculations generally aren't necessary, as you can see here in the Form 8965 instructions.
2. Penalty calculations aren't as difficult as they appear.
The instructions to Form 8965 also explain how to calculate any penalty from not having health coverage. As you can see below, the primary worksheet looks incredibly complicated:
But it's important to keep the general idea in mind. The general penalty is $95 per adult plus $47.50 per child without coverage, up to a maximum of $285 regardless of how big your family is. But if 1% of whatever income you have above your appropriate filing threshold is greater than that amount, then you pay the higher amount instead. The mechanics of the form go into month-by-month detail, but the net effect will be to reduce your penalty to reflect appropriate coverage you might have had during part of the year.
3. Premium tax credit provisions apply if your income is a lot different from expectations.
The premium tax credit looks the most complicated, with Form 8962 [opens PDF] looking like every taxpayer's nightmare. Among other things, you'll find this very scary table:
Again, though, keep the big picture in mind. The general idea here is that, if you received a subsidy on your coverage based on preliminary estimates of how much income you have, this form lets you verify that any differences in your actual income won't affect the subsidies. In general, if you earned more than you expected, your subsidy should have been less, and so you'll owe money back. Conversely, if your income was lower than expected, then your subsidy should have been more, and you'll get a bigger refund.
Dealing with the tax implications of Obamacare won't be easy for many of the millions of Americans who will have to take them into account at tax time. Nevertheless, by keeping the general concepts of the tax provisions in mind, you'll be better able to navigate the required forms, and come to the right answers.