Introduction

On Wednesday, September 10th the Internal Revenue Service (hereinafter the “Service”) Commissioner John Koskinen (hereinafter “Commissioner Koskinen”) informed a congressional subcommittee about the Service’s progress on the Affordable Care Act and the impact that tax subsidies will have on the upcoming 2015 tax season. In a hearing before the House Ways and Means Health Subcommittee, Commissioner Koskinen discussed how the Service would be processing the premium tax credit, which helps subsidize the cost of health insurance coverage for eligible taxpayers.

Commissioner Koskinen duly noted that eligible taxpayers can choose to have their insurer receive advance payment of the tax credit, the amount of which is based on a determination made by a health insurance marketplace or exchange. The amount of the tax refund may be increased or decreased according to how much of the tax credit is correctly calculated. Commissioner Koskinen further explained in his prepared testimony that “at the end of the coverage year, taxpayers who opted for advance payment of the credit will reconcile the payment on their 2014 tax returns filed in 2015”. Commissioner Koskinen further stated “when filing tax returns, these taxpayers will calculate the actual credit they qualified for based on their actual 2014 income. If the actual premium tax credit is larger than the sum of advance payments made during the year, the individual will be entitled to an additional credit amount. If the actual credit is smaller than the sum of the advance payments, the individual’s refund will be reduced or the amount of tax owed will be increased, subject to a statutory sliding scale of income-based repayment caps.”

Draft Tax Compliance Forms Released

The Service recently issued a draft version of the new Form 8962 entitled “Premium Tax Credit” which taxpayers will utilize to claim the premium tax credit and file with their income tax returns. The Service has also developed a draft version of the Form 1095-A entitled “Health Insurance Marketplace Statement” and the instructions, Commissioner Koskinen noted, to facilitate the reconciliation process for the premium tax credit.

Commissioner Koskinen indicated that “beginning with coverage purchased in 2014, each Marketplace will issue the Form 1095-A to individuals who purchased a policy through the Marketplace”.Commissioner Koskinen further stated that “the Service recently issued a draft version of the form and its accompanying instructions. The transactional information contained within Form1095-A issued by the Marketplace will include not only the fact and cost of coverage, but also information on any advance payments of the premium tax credit made during the coverage year to the taxpayer’s insurance company on his or her behalf. This information will also be supplied to the Service.”

Commissioner Koskinen further advised that the Service is currently in a testing phase with both the federal and state health insurance marketplaces to ensure that its systems will be ready to operate as planned when filing season opens in early 2015. The marketplaces are responsible for reporting the necessary information accurately and on time to the IRS to allow the agency to efficiently sort for the basic qualification and computational elements of the premium tax credit.

Conclusion

It is highly anticipated that the recently released draft tax compliance forms to capture the premium tax credit will be finalized before the 2014 calendar year-end with minimal, if any, changes. To ensure proper tax compliance with the new tax laws governing this area, be sure to consult with a subject matter expert within this area of the tax law.

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