IRS tweaks one process with Affordable Care Act

Feb. 26--I doubt that many tax filers ever realized that the IRS initially planned to reject your tax return on the spot this year if you did not declare that you had health care coverage for a full year or offer the appropriate exemption.

It was a new twist -- but one that disappeared so fast that if you blinked, well, you didn't have to worry about it at all.

But here's the deal anyway. Tax processing was thrown a bit of a loop when President Donald Trump signed an executive order on Inauguration Day -- Jan. 20 -- that directed federal agencies to exercise the authority available to them to reduce the potential burden of the Affordable Care Act.

The order seeks to "minimize the unwarranted economic and regulatory burdens of the Act."

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In response, the Internal Revenue Service stated on Feb. 15 that it has decided to continue to allow e-filed and paper tax returns to be accepted for processing, even when the taxpayer does not indicate a status for health care coverage on the tax return.

Before the president's executive order, the IRS had put a system in place beginning this year to automatically reject any tax return that didn't provide information relating to health care coverage.

Some say it makes sense for the IRS to ditch the plan, no matter what happens in Congress. They argued the federal government was taking things too far by putting automatic rejections into motion for the 2016 tax returns based on health care issues.

"That was too strict of an interpretation," said George W. Smith IV, a Southfield-based accountant.

After all, Smith said, the Affordable Care Act has complex tax rules where it could be easy to make a mistake and not check the appropriate box. It's harsh to systematically reject a return for that reason, he said. If a mistake or omission is made, the IRS still is able to correspond later by mail with a tax filer.

Beginning with 2014 tax returns, the Affordable Care Act became one of the biggest changes to the tax code in 20 years. Tax returns are an important part of so called Obamacare where most U.S. residents have to health insurance -- or prove they have a legitimate reason for going without coverage. But the rules, penalties and forms can be confusing. It can be particularly confusing if you're uninsured or if you received the Premium Tax Credit in advance to help cover the cost of insurance.

The penalties have gradually become tougher for the uninsured who do not qualify for exemptions.

For 2016, the individual shared responsibility payment could be 2.5% of your total household adjusted gross income. Or you might pay $695 per adult and $347.50 per child for a maximum of $2,085. You'd pay whatever is higher, and the payment or penalty is prorated for the months without coverage.

Possible exemptions include: You were uninsured for less than three months of the year. Or the most affordable coverage costs more than 8.13% of your household income. Or your religion objects to the use of insurance. Or you filed for bankruptcy. Other exemptions are possible, too (see www.healthcare.gov for more information on exemptions).

If you didn't have coverage, see Form 8965 to file for an exemption. If you have an exemption, you'd avoid paying any fee or penalty.

"The Individual Shared Responsibility Payment is higher this year so it is important that taxpayers look at all possible exemptions that might apply," said Marshall Hunt, certified public accountant and director of tax policy for the Accounting Aid Society's tax assistance program in metro Detroit.

Most tax experts say people should follow the tax rules as they exist now. Don't delay filing a tax return on some odd hope the rules will change going back to 2016.

Trump is seeking the prompt repeal of Obamacare but rolling back the law will be a complex process. It's possible that only parts of the act might be repealed this year by Congress.

Trump is set to speak on Feb. 28 to a joint session of Congress. Most recently, Trump said his intention is to submit a health care reform package sometime in early March or mid-March.

While Washington is abuzz with talks about Obamacare, tax filers need to proceed with the paperwork that could be needed relating to exemptions or the premium credit.

On Form 1040, see Line 61 for the line that states "Health care: individual responsibility (see instructions)." On the 1040A, you'd see Line 38.

You'd check the box if you had full-year coverage and be done with it.

One does not need to wait to receive 1095-B or 1095-C forms to file one's taxes if you have other documents to back up the claims. You'd receive 1095-B for minimal essential coverage from a health insurer or 1095-C for employer provided coverage.

Tax filers who obtained coverage through the marketplace receive a Form 1095-A, a Health Insurance Marketplace Statement. You should not file your taxes without an accurate Form 1095-A. You need the form to reconcile any advance payments for the premium tax credit or to claim the premium tax credit on your tax return.

You do not attach the 1095-A, the 1095-B or 1095-C forms to your tax return.

If you haven't received the form by now, see HealthCare.gov.

Mark Luscombe, principal analyst of tax and accounting at Wolters Kluwer in Riverwoods, Ill., said the executive order only changes some processing methods.

"It doesn't eliminate your need to pay the penalty. It just says we won't automatically reject your return if it's not addressed," Luscombe said.

For that reason, he recommends filling out the appropriate box or forms.

If someone skips providing information, he said, there's the risk that the IRS would send out a correspondence audit by mail in which the IRS asks for further information about a specific item or issue on a specific tax return.

Luscombe said it's his belief that the health care obligations and possible fees will remain in place for 2016 and tax filers should follow the tax rules as they exist now.

"It's very unlikely anything would change with respect to the 2016 tax return," Luscombe said.

Contact Susan Tompor: [email protected] or 313-222-8876. Follow Susan on Twitter @Tompor.

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