Health Insurance and Your Tax Return - What to Know

For the first time, 2014 tax returns included health insurance information

Large employers, insurance carriers, and exchanges all report health coverage to the IRS
As the 2015 tax season gets underway, there will be a flurry of tax forms reporting coverage to the IRS. Schafer & Hill/Mobile Moment/Getty Images

Prior to 2014, there was no requirement that people have health insurance. Most people did have coverage, but roughly 16% of non-elderly Americans were uninsured in 2013 - down from more than 18% in 2010 at the end of the recession.  

And prior to 2014, coverage was available for purchase in the individual market, but applicants in most states had to be reasonably healthy in order to qualify for coverage.

Medicaid was available, but typically only for low-income children, pregnant women, disabled applicants, and some very low-income parents. Most states didn't provide Medicaid coverage to non-disabled childless adults regardless of how low their incomes were.

Coverage is easier to get

All of that has changed. For millions of Americans, coverage is much more accessible than it once was:

  • Coverage in the individual market is guaranteed issue now, which means your health history is no longer a factor in your eligibility for coverage or the price you pay.
  • For people with incomes up to 400% of the poverty level (currently $97,000 for a family of four), premium subsidies are available through the exchanges to offset a portion of the premiums. Cost-sharing subsidies lower out-of-pocket costs for people with incomes up to 250% of the poverty level, as long as they pick a silver plan.
  • In 30 states and the District of Columbia, Medicaid has been expanded to cover everyone with incomes up to 138% of the poverty level, making health insurance much more accessible to low-income Americans. 

Coverage is now required

With all the changes that make health insurance easier to obtain, there's also a requirement that nearly all Americans maintain continuous health insurance coverage.

There are some exemptions to the requirement, but for people who don't qualify for an exemption, there's a penalty for being uninsured

The penalty started out small in 2014 (for tax filers subject to the penalty, the average penalty was about $200). But it was much larger in 2015, and will be larger still for people who are uninsured in 2016; estimates are that the average tax filer subject to a penalty for 2016 will have to pay almost $1,000.

Numerous sources report to the IRS

Now that we're all required to have health insurance, the IRS gets reporting from individuals, employers, exchanges and health insurance carriers:

Starting in early 2015 - for the 2014 tax year - individuals and the IRS began receiving these reporting forms, although reporting was still voluntary for insurers and employers in 2014.

It became mandatory starting with 2015 coverage that was reported in early 2016 (on December 28, 2015, the IRS issued an extension that allowed employers and insurance carriers extra time to send out Forms 1095-C and 1095-B; previously, the deadline to provide those forms to individuals was February 1, 2016, but it was extended to March 31, 2016. This extension applies for the 2015 coverage year only).

The forms indicate the months of the year you had coverage, which is important because even if you have coverage for part of the year, a prorated penalty applies if you have a gap in coverage that lasts more than two months.

For 2015 coverage, the tax forms were mailed to individuals and the IRS in early 2016, and used to complete 2015 tax returns. For 2016 coverage, the forms will be mailed in early 2017, and the one-time extension that was issued in late 2015 will not apply; the forms will have to be issued by February 1, 2017.

Reconcile your subsidy with Form 8962

If you received a premium tax credit (subsidy) that was paid to your insurer on your behalf throughout the year, OR if you paid full price for a plan purchased in the exchange but you're actually eligible for a premium subsidy, you use Form 8962 to reconcile your subsidy (note that subsidies were being paid monthly on behalf of almost 84% of people who were enrolled in the exchanges nationwide in 2015; if you've got a plan through the exchange, chances are it came with a subsidy. That money is paid directly to your insurance carrier, rather than to you, so in some cases, people have not been aware that they're actually receiving a subsidy). Failure to reconcile your subsidy using Form 8962 will result in the loss of your monthly subsidy going forward; it's essential that you file a tax return and include Form 8962 if you're receiving a premium subsidy.

Since the subsidy that was paid on your behalf throughout the year was based on your projected income, it might have to be adjusted once you know what your actual income was for the year. If your income ends up higher than you projected, you may have to pay back a portion of your subsidy. If your income ends up over 400% of the poverty level, you'll have to pay back the entire subsidy, but as long as it stays under that level, there are caps on the amount you'll have to repay.

And conversely, if your income ends up being lower than you anticipated, you may receive an additional premium tax credit when you file your taxes.

If you paid full price for your coverage but end up with an income that makes you subsidy-eligible, you can claim your full subsidy on your tax return - but only if you purchased your health insurance through the exchange. This is a good reason to shop in the exchange even if you don't think you'll qualify for a subsidy; if your income changes mid-year, you'll be able to start receiving the subsidy at that point, or claim it on your tax return, as long as you have coverage through the exchange (you can't switch from an off-exchange plan to an on-exchange plan mid-year unless you have a qualifying event).

Don't forget that contributions to an HSA lower your adjusted gross income (AGI). If you've got an HSA-qualified High Deductible Health Plan (HDHP), you could end up getting a larger subsidy by contributing to your HSA - talk with your tax preparer to see if this might be useful in your situation.

What if you owe a penalty?

If you were uninsured and owe a penalty, that will be calculated on your tax return as well. If you owe a penalty, the IRS will deduct it from your refund - or from refunds you're owed in future years, if you aren't getting a refund this year. The penalty cannot be enforced using the normal channels the IRS has at its disposal (liens, levies, jail time), but most tax filers get a refund, and the average refund is more than enough to cover the average penalty for being uninsured.

Sources

Centers for Medicare and Medicaid Services, June 30, 2015 Effectuated Enrollment Report. Accessed 5/16/2016.

Internal Revenue Service, Individual Shared Responsibility Provision - Exemptions: Claiming or Reporting. Accessed 5/16/2016.

Internal Revenue Service, Form 1095-A, Form 1095-B, and Form 1095-C. Accessed 5/16/2016

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