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February 20, 2015

The Affordable Care Act tax filing season: A view from the trenches

February 20, 2015

This post originally appeared on the Urban-Brookings TaxVox blog.

Several of us at the Tax Policy Center volunteer with Community Tax Aid to help low-income people file their taxes. We’ve had a chance to see, first-hand, how the Affordable Care Act is affecting tax filing.

This is the first filing season when taxpayers must navigate the new provisions of the ACA on their 1040s. The health law affects our clients in three ways: It creates premium tax credits for people who have purchased their insurance through a marketplace, a mechanism to adjust those subsidy amounts if they were incorrect, and a penalty for those who do not have health coverage.

And, as we are learning, sorting through all the necessary paperwork is hard to do, even for those of us whose day jobs are in tax policy.

So far, most of our clients have Minimum Essential Coverage either through an employer, Medicare, or Medicaid, but we’ve already seen a few who owed penalties because they were uninsured or had lapses in coverage. We expect to see some clients who will have to pay additional tax (or perhaps get a refund) because their 2014 income differed from their 2012 income used to calculate their subsidies when they applied for insurance through the exchange.

Early in the tax season, we tend to see clients who expect large refunds from the Earned Income Tax Credit. Many are eligible for Medicaid or for Advance Premium Tax Credits that subsidize their marketplace coverage.  Since most of us volunteer in D.C. and Maryland, our clients are eligible for expanded Medicaid coverage.

Some of those who don’t have health coverage do not seem aware that they may face a penalty. Though the general open enrollment period for exchange coverage ended on February 15, the Obama administration announced today that taxpayers who pay the penalty can enroll until through April—though they will have to indicate that they did not know about the penalty until they filed their taxes.

How do our clients respond to ACA tax payments? That seems to depend on whether they owe a balance or are getting a refund.  Because our site has an income limit, the penalty our clients face for not having coverage is typically under $300. However, they could owe a substantial amount—potentially thousands of dollars—if they received excessive credits for marketplace coverage. So far, at least, we’ve had limited experience with those who must make repayments.

Filing is not simple, even for our volunteers who all undergo rigorous training in tax law. Some people who did not have minimum insurance in 2014 may still be exempt from penalties for a number of reasons, including if coverage in the marketplace is considered unaffordable, or their income is under the filing threshold. Some exemptions are granted by the marketplace; others are reported on tax returns, but will require more documentation in future years.

Completing the forms requires reporting a high level of detail on month-to-month changes in coverage and cost. The ACA has an additional complexity for people who live in states that did not expand Medicaid, including Virginia, where taxpayers below 138% of the federal poverty level are exempt from the penalty.

This year, the ACA will affect the tax filing of millions of uninsured Americans and those who were able to purchase coverage in the marketplace, but filing is complicated and we are still learning about the aggregate effects of the new tax provisions related to the ACA.

For a broader discussion of Tax Filing and the Affordable Care Act, join us at the Brookings Institution on February 24 at 8:30 AM. A panel of policy experts will look at what the ACA means for taxpayers and ways to make their lives easier and increase insurance coverage.

Photo by Matt Rourke/AP

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