Understanding the ACA This Tax Season

The provisions of the Affordable Care Act have finally taken effect, leaving Americans vulnerable to tax penalties if they do not have some type of health insurance coverage. As you enter the busy tax season, your clients are likely to have more questions about how the Affordable Care Act affects their returns. The following are several considerations to help you advise your clients effectively in 2015.

Americans who do not have health insurance coverage, whether it is through a private plan or an employer-sponsored group plan, are penalized for not complying with the Affordable Care Act. For the 2015 tax season, the penalty is the greater of 2 percent of household income or $325 per person, with a cap of $975 per family. These amounts may come as a surprise to your clients because they are much higher than they were in 2014. The old cap was $95 per adult, $47.50 per child and $285 maximum per family. In 2016, the penalty increases to $695 per adult, $347.50 per child and a per-family cap of $2,085.

Those who sign up for ACA plans may qualify for subsidies based on their income. This can have unexpected consequences come tax time because applicants must enter their yearly household income when they apply for ACA coverage. If a salesperson applies based on last year's income of $30,000 and earns double that amount in base pay and commissions, the amount of the subsidy he received might be deducted from his next tax return.

Tax forms are also more complicated. People must fill in their insurance information on their tax forms, regardless of whether the coverage is through an employer-sponsored plan or a state or federal exchange. As a result, it takes more time to gather the information necessary to complete a federal tax return. Taxpayers who receive advance credits when they purchase coverage through an exchange also have to reconcile their advance credits and income when they file their tax returns.

Tax withholding rates have also changed since the Affordable Care Act was implemented. The employee portion of the Medicare tax increased by 0.9 percent for single people earning more than $200,000; married people earning more than $250,000 and filing jointly; and married people earning more than $125,000 and filing separately. However, taxpayers are not liable for the tax unless they exceed the $200,000 threshold. If a taxpayer does not exceed the threshold, the excess withholding is returned in the form of a credit.

Tax preparers and accountants have their hands full as taxpayers try to comply with the requirements of the Affordable Care Act. As an accounting professional, be prepared to spend extra time helping your clients gather information and answer whatever questions they have about the law and its associated penalties.

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