Calculating the ACA’s new Premium Assistance Tax Credit is No Simple Task

If your idea of a good time is a new tax credit that works differently from other credits, that’s calculated per person and per month, and will likely cause the filing season to start late and end early, then 2015 is the year you have been waiting for. Welcome to the Premium Assistance Tax Credit (PATC), compliments of the Affordable Care Act.

The PATC is a complicated new credit based on a number of new concepts that is calculated and reported on new IRS form 8962. The purpose of this post is to give a general overview of the credit and bring awareness to its complexity so that you will be on the lookout for new information as it is released.

 One way the Premium Assistance Tax Credit is different from other credits is that it could produce either positive or negative results for clients. While credits generally benefit a taxpayer, the PATC could require repayment which would cost the taxpayer money and lower their refund or increase their balance due.

Another way the Premium Assistance Tax Credit is different from other credits is that it doesn’t necessarily begin on the tax return; it can begin in the government-run health insurance exchanges, like www.HealthCare.gov, long before the return is filed.

The Affordable Care Act mandate that every American has health insurance at all times sets the standard for minimum essential health insurance coverage and puts limits on the dollar amount individuals and families pay for health insurance. In general terms, when the cost of a heath insurance plan is higher than the government limit, the Premium Assistance Tax Credit can kick in to cover the difference.

For example, if the cost of a desired health insurance plan is $750/month but ACA standards limit the taxpayer’s cost to $500/month, the Federal Government subsidizes the taxpayer by making a payment of $250/month directly to the insurance company on behalf of the taxpayer. When the credit works this way and is paid in advance of the tax filing, it is known as an Advance PATC.

Advance PATC subsidies are calculated when the insurance is purchased and are based on assumptions made by the taxpayer at the time of purchase, like expected household income and family size. However, for many taxpayers, these assumptions will change during the tax year and create a discrepancy between subsidies paid and subsidies allowed. Starting next year taxpayers will be required to reconcile the advance payment assumptions with what actually happened during the tax year and calculate a new PATC amount. If the taxpayer has not received the full amount of eligible PATC in advance, he or she can claim it as a refundable credit when the 1040 is filed. However, if the amount of advance PATC is greater than the eligible PATC amount, the taxpayer must repay the overage, requiring them to return money they never actually received.

In addition, taxpayers who did not originally qualify for the Advance PATC, did not take the Advance PATC, or who claimed less than the full amount allowed, but qualify after the reconciliation, can claim the PATC as a refundable credit on Form 1040, line 69.

Information required to reconcile the Advance PATC will be provided on new IRS form 1095-A, Health Insurance Marketplace Statement. This statement, similar to the 1099 series of forms, will be issued by the Health Insurance Marketplaces for each policy purchased through a marketplace and must be sent to taxpayers on or before January 31, 2015 for tax year 2014. It will show the assumptions made when purchasing health insurance and provide a basis for the PATC reconciliation.

While this will affect every taxpayer who purchased insurance through the Marketplaces, it could hit lower-income taxpayers with simpler returns disproportionably hard. For starters, they may not be able to file as early as usual while they wait for their 1095 to arrive in the mail. In addition, the PATC reconciliation is a complicated series of new forms and cannot be taken on the 1040EZ so their tax prep bill is likely to rise.
*Finally, according to IRS attorney Kim Koch, taxpayers who do not complete the PATC reconciliation in 2015 will not be eligible for subsidized health insurance in 2016. Since IRS currently plans to verify the reconciliations in September, that could turn a traditional 6-month extension into something less. Keep that in mind when planning your workload for the fall.

To see the new PATC forms, including new forms 8962, 8965 & 1095, check out the IRS draft forms here: http://apps.irs.gov/app/picklist/list/draftTaxForms.html .

ABOUT THE AUTHOR:

Jerry Gaddis, EA is the Founder and CEO of Tropical Tax Solutions, a full-service tax firm located in the Florida Keys. He earned a BS Degree from the University of Florida and an MBA from the Crummer Graduate School of Business at Rollins College in Winter Park, FL. He currently serves on the Board of Directors for the National Association of Enrolled Agents and you can interact with him on LinkedIn and Twitter (@TropicalTax).