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Healthcare Reform News: IRS Grants Penalty Relief for 2014 Premium Credit Shortfalls, Issues New Tax Forms

February 23, 2015

Bruce A. Desrosiers, CPA, MST
Director

Healthcare tax incentives can result in unexpected penalties for underpayment of estimated taxes, as well as late payment of taxes in some cases. The IRS issued notice 2015-9 to provide some relief from penalties that result from a reconciliation of advanced premium payments/subsidies and the Premium Tax Credit that is ultimately calculated on a taxpayer’s return.

Taxpayers of modest means may have gone to a state (or federal) health insurance exchange to obtain health insurance in 2014. These same taxpayers could potentially be eligible for a tax credit based on household income and other factors. Some may have elected to have the “estimated” tax credit applied to current health insurance premiums in an effort to reduce the monthly out-of-pocket costs for the insurance purchased through the exchange. When filing their tax returns for 2014, the taxpayers are required to prepare a reconciliation of “actual” tax credit to advance payment of the subsidy that was “estimated. Any difference is required to be repaid with the filing of the return and is treated as a tax liability.  Any additional amount of credit would result in a refundable overpayment.

Some returns may not reflect required estimated tax payments, or may not have enough paid through withholdings, to cover the difference determined to be owed on the return. This shortfall could result in late tax payment penalties. Note that this rule does not apply to the penalty for not having insurance.

IRS will abate penalties.The IRS has announced that it will abate the late payment penalty for tax year 2014 for taxpayers who (i) are otherwise current with their filing and payment obligations; (ii) have a balance due for the 2014 tax year due to excess advance payments of the premium tax credit and (iii) report the amount of excess advance credit payments on their 2014 timely filedtax return, including extensions (Line 46 of Form 1040 or Line 29 of Form 1040A).

The IRS will also waive the penalty for tax year 2014 for an underpayment of estimated tax for taxpayers who have an underpayment attributable to excess advance credit payments if the taxpayers (i) are otherwise current with their filing and payment obligations and (ii) report the amount of the excess advance credit payments on a 2014 timely filed tax return, including extensions. The interest on late paid taxes cannot be waived and will continue to be charged after April 15, 2015 (original due date of the return).

New forms used in calculating the credit and reconciling the advanced payment include Form 1095-A, issued by the exchange, which includes advance premium subsidies by month of payment. This information is used on Form 8962 “Premium Tax Credit,” to reconcile advance payments to actual credits allowed on the taxpayer’s return.

Another new form is Form 8965, “Health Coverage Exemptions”. If exempt from the requirement to have minimum essential health insurance coverage, this form is used to report the specific exemption for which the taxpayer qualifies. Taxpayers who qualify for an exemption would not be subject to the individual mandate penalty. However, taxpayers who are subject to the penalty should use the Form 8965 worksheet to calculate the amount for themselves and/or dependents on their returns.

Taxpayers who have met the individual requirements to have minimum essential health coverage may simply check a box on their tax returns and do nothing further. The box will appear on the 1040 series of forms. Below you will find some links to the forms and notices referenced above.

For more information please contact Bruce Desrosiers at bdesrosiers@blumshapiro.com.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof, and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

 

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