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Covered California and Obamacare related questions from consumers, employers and agents are answered by Phil Daigle with the best information available at the time. Archived entries may no longer be accurate as the Covered California and Obamacare knowledge-base is evolving quickly. TO REQUEST A PERSONAL RESPONSE INCLUDE EMAIL ADDRESS.


Tax Filing Requirement?

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Question: I am a tax professional and need to ask what happens, as with many self employed clients, if they don't file by 4/15/14, even though they signed up promising to do so. Will the extension rules be the same or are there addtional penalties?

Question: Filing for an extension by 4/15/14 should satisfy the letter of the law, but I would ask one of my legal-eagle commenters to find a citation for this.

21 Comments

IRS has announced that it is will grant relief from penalties amounts owed due to delayed payment of clawback amounts. See https://obamacareguide.wordpress.com/2015/01/26/a-little-bit-of-good-news-from-irs/#more-251

Essentially taxpayers will have an additional year to pay - until April 2016. Interest will still run on the amount, but the penalties can be waived.

Taxpayers do have to affirmatively request the penalty relief, after getting an IRS notice.

I’d note that it is also possible to request an installment payment plan online for amounts owed to IRS - this is true for all taxes owed, not just the clawback. But if the problem is being short on cash in April when the bill comes due, that can be a big help — an a taxpayer who files for an extension but also sets up a one-year installment plan in April would end up meeting the requirement to avoid penalties.

Just reread Steven’s comment about tax filing extensions. While it may be OK to file the return in October, if having to repay premium tax credits means a person owes money to the IRS, there are penalties and interest which accrue from April 16 on the amount not paid by April 15. The time extension is only for filing the return, not the actual tax due. Too many people make that mistake.

Stephanie and Max: A medical expense deduction will not reduce modified adjusted gross income, which is used to reconcile advanced premium tax credits.

Stephanie …

You should consult a tax professional before filing your 2014 income tax return. If your non-premium medical expenses exceeded 10% of your adjusted gross income, you may be able to deduct the excess expenses, which would reduce your taxable income and, in turn, lessen the amount of premium tax credits you need to repay to the IRS.

Understand that the PPACA was not designed to give middle income taxpayers much genuine relief from the cost of health insurance, and does little or nothing to improve your cost of living.

This question is in regards to Covered CA vs. year end taxes. My income for the 2014 year was $32,700. My medical out of pocket was $14,800. This left me with $17,900 to live on for the year.

Unable to live on $17,900 I had to withdraw $15,000 from an IRA.

Now I must pay Covered CA (Federal) $2,500 due to the withdrawal. On paper it looks like I made a lot of money but in reality (after expenses/deductions) my take home was not that great.

Is there anything in the tax laws stating if medical deductibles are in excess that it would offset taxes?

I do not believe it is a good idea to file a tax return with mistakes and do believe I addressed the concern regarding tax filing extensions and APTCs for year 2014 in a previous comment which read:

“The final regulations provided that a taxpayer who receives advance credit payments must file an income tax return for that taxable year on or before the fifteenth day of the fourth month following the close of the taxable year. Under the proposed regulations, a taxpayer who receives advance credit payments must file an income tax return on or before the due date for the return (including extensions).”

“Section 36B of the IRC - Miscellaneous Issues - j. Requirement to file a return to reconcile advance credit payments”

Material on the IRS web site seems to suggest that filers may seek a 6 month extension without penalty — see: http://www.irs.gov/publications/p17/ch01.html#enUS2014_publink1000170688

See the section, “Table 1-3.Other Situations When You Must File a 2014 Return” and also “Table 1-5. When To File Your 2014 Return”.

I’m pretty sure that if there was an exception to the automatic extension provisions for tax credit recipients, IRS would say so.

So the bottom line is:

  1. You have to file for 2014 in order to claim the credit, even if you didn’t make enough income to otherwise be required to file for taxes.

  2. You either need to file a completed return by April 15, 2015, OR you need to file a Form 4868 request for extension by that date.

3 If you file Form 4868, your deadline for filing and claiming (or retaining) your tax credit will be October 15.

  1. Don’t ask insurance agents for tax advice. Either rely directly on IRS publications or seek advice from a tax accountant. And if anyone tells you anything different… ask them to cite a regulation or IRS notice.

The consequences of not filing a tax return on or before April 15, 2015 is quite simple … a loss of 100% of the tax credits available, including those paid in advance by CoveredCA to the insurance company.

That 100% payback is not subject to the “clawback” limitations for underestimating income.

So, caveat emptor, if you accepted APTCs in 2014, you MUST FILE a tax return on or before April 15, 2015. It would be better to file one with mistakes that can be corrected with the filing of a 1040-X rather than risk losing all of the premium tax credits.

Cate, People will surely file extensions despite their best intentions some 15 months earlier. What are the consequences of filing for an extension on 4/15/15?

I am confused by last entry. Can a person file an extension to 10/15/15 if they have gotten premium assistance thru the ACA? Or must they file by 4/15/15.

“The final regulations provided that a taxpayer who receives advance credit payments must file an income tax return for that taxable year on or before the fifteenth day of the fourth month following the close of the taxable year. Under the proposed regulations, a taxpayer who receives advance credit payments must file an income tax return on or before the due date for the return (including extensions).”

The IRS regulations allow CoveredCA to report advance premium tax credits using Form 1095–A, which must be provided to taxpayers on or before January 31 of the year following the coverage year.

We’ll see if they are able to do that. Given the fact that they still haven’t paid any agents the $58 per Medi-Cal enrollment we were told to expect, I have no idea what their capabilities are at this point.

Robert, here’s some more detailed information - it’s a link to the IRS final regulations: http://www.irs.gov/irb/2014-22_IRB/ar04.html

Hi Robert.

Here is the answer to your question: http://www.convey.com/1099-news-tax-blog/irs-regulation-updates/new-tax-information-forms-accompany-aca-rollout/

The exchanges will file a form 1095-A for each taxpayer — that tells what their premiums are and the amount of advance tax credit, if any.

The health insurance companies file a form 1095-B - that tells the duration and type of coverage.

Large employers file a 1095-C.

As a tax professional, I am concerned with what type of information will be sent to the person enrolled in Covered California to be used in the credit reconciliation for tax purposes. Will it be a 1099 type form? What is the time line for the information to be sent to the taxpayer? Will insurance companies be sending taxpayers information regarding their coverage, months of coverage, cost, etc? What is the timing? It seems that all of this information will be needed for the credit reconciliation on the tax return. Thanks for your help.

Max wrote: ” If a person has received the benefit of too much in the way of APTCs in 2014, the IRS may “clawback” up to $1,500 (through tax due or refund withheld or decreased).”

===========

This is incorrect.

If the year’s income is above 400% of the FPL, then the full amount of the tax credit is subject to clawback.

Income between 300-400% of the FPL has a $2500 upper limit on clawback amount. The $1500 figure applies to income under the 300% level. Under 200% of FPL, the maximum is $600

It’s spelled out very clearly in the law — 26 USC 36B, section (f). See http://www.law.cornell.edu/uscode/text/26/36B

Kristine …

Yes, 2012 tax returns were requested because that’s the last year for which the IRS can match reported income — at least that was true prior to 12-31-2013.

And it’s also true that 2013 income is immaterial as far as tax credits are concerned because there are none for 2013. What will matter is 2014 income reported in 2015.

Most people don’t realize this is the same methodology that Social Security uses to charge people with large incomes higher premiums for Medicare Part B. There is always a two-year look back because that’s the only thing the government knows for sure at the beginning of a new year.

Max Herr: I’m confused why there is no tax return requirement for APTC until the 2014 returns are filed in 2015. If 2012 and 2013 returns are “immaterial” for receiving APTC, then CC appears to using them like stated income. Many of us have submitted 2012 returns as income verification in order to qualify for the subsidy in 2013. But the actual income and subsidy amounts gets recounciled on the 2014 return filed in 2015, correct?

Yes. The extension rules will be the same and filing taxes on or before the extension due date follows the letter of the law.

My answer pertains to the year 2014 tax filing season with due dates of 04/15/15 and 10/15/15.

Yes to what? Tax credits are first available in TY 2014, not TY 2013, so there is no requirement, as the OP asked about, for anyone to have filed a tax return in 2014 for 2013. 2013 is immaterial to 2014 APTCs.

There is no requirement to file a 2013 return in 2014 — it has no bearing on 2014 premium tax credits. Premium Tax Credits will apply to one’s 2014 federal income tax return when filed in 2015.

The challenge for self-employed persons is whether to accept Advance Premium Tax Credits (APTC) at all in 2014. What is important is to enroll in a health plan through CoveredCA. APTCs are fully refundable when a tax return is filed. If the person’s income is higher, the credit will be lower, and vice versa. If a person has received the benefit of too much in the way of APTCs in 2014, the IRS may “clawback” up to $1,500 (through tax due or refund withheld or decreased).

If the taxpayer does not require the APTC to pay for premiums now, then it may make more sense to pay 100% of the premium in 2014, take that as a MAGI reduction, and claim the full tax credit at the time of filing the 2014 return based on actual MAGI — higher or lower than expected, but without the clawback looming on the horizon.

The answer is yes.

“The final regulations provided that a taxpayer who receives advance credit payments must file an income tax return for that taxable year on or before the fifteenth day of the fourth month following the close of the taxable year. Under the proposed regulations, a taxpayer who receives advance credit payments must file an income tax return on or before the due date for the return (including extensions).”

“Section 36B of the IRC - Miscellaneous Issues - j. Requirement to file a return to reconcile advance credit payments”

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