DAVID MCKAY WILSON

Tax Watch: Obamacare could bring 1040 headaches

David McKay Wilson
dwilson3@lohud.com
  • The tax penalty for uninsured adults is the greater of $95 or 1 percent of your income
  • The penalty rises to 2 percent of income for 2105 tax year, and 3 percent for 2016.
  • How one's 2014 income reconciles with subsidy on Obamacare policies will determine if you owe the federal government
Martha Holcomb holds her health insurance statement showing she paid the 33 cent-per-month premium. She said she questioned the very small amount but was told that was the amount she owed. She ended up having $770 deducted from her tax refund because her premium should have been higher.

The Affordable Care Act provided health care to millions of Americans.

It could cause headaches for millions, too, as they fill out their 2014 federal tax returns.

Consider Martha Holcomb, 64, of Mount Vernon, who had the good fortune of landing a policy through the program with a monthly premium of just 33 cents.

"I couldn't believe it was so low," she said. "But they added it up again and that's what they said it came to."

Holcomb recently did her federal income taxes, with the assistance from the free AARP Tax Aide program at the White Plains Community Center at 65 Mitchell Place. There, Holcomb received the disheartening news: She owed the federal government $770.

She owed the money because the subsidy she received on her health insurance policy was too high for her income, which came to about $26,000 in 2014.

At least Holcomb didn't have to cough up the cash. The $770 charge reduced her refund to about $320.

"I knew my premium was low, but I didn't think they'd end up charging me this much," said Holcomb.

George Curtis, local coordinator of the AARP Tax Aide program, said the health insurance issue has arisen in many returns as the tax-filing season ramps up.

"We'd had the reverse too," said Curtis, who runs the program from 10 a.m to 3 p.m daily, with no appointments necessary. "Ms. Holcomb had a little more income than she predicted, and she had to pay. We've had others who had less income than they thought. They were happy to learn that they'd be getting a big refund."

Holcomb's experience could be replayed throughout the region this winter and spring as taxpayers dig into their receipts, W-2 statements and health insurance documents to figure out their tax liability for 2014. There's no change for taxpayers who receive their health insurance through their employers.

But the tax implications of the Affordable Care Act are twofold for those who do not.

First, there's the tax penalty for those who aren't covered by insurance. For 2014, those without insurance have to pay the greater of $95, or 1 percent of their modified adjusted gross income, says Robert Winton, a partner at Citron Cooperman, in White Plains. The modified adjusted gross income includes foreign income, non-taxable Social Security and other tax-exempt income. For someone earning $50,000, the penalty for the 2104 tax year would be $500.

This is only the start. The penalty for the uninsured ratchets up to 2 percent for 2015 and 3 percent for 2016.

Then there's the federal subsidy for health insurance policies obtained through New York's health exchange. Subsidies of varying levels were provided for individuals with a modified adjusted gross income of up to $45,950 a year, which is up to four times the federal poverty level. For families, the income limit to qualify for a subsidy depends on family size, with a family of four able to obtain a subsidy if family income is under $94,200.

The 2014 tax return will reconcile the subsidy received — which will be documented in Form 1095A — with the actual income reported for the year. That's what Martha Holcomb learned when she filled out her 1040.

"You are going to have to see how much of a credit you ended up being eligible for, and if it matches up with the credit you got on your health insurance premium," Winton said. "It's brand new, and a fairly complicated part of the tax return. It's going to be learn-as-you-go."

Twitter: @davidmckay415

Tax Hotline

If you want answers to questions about your income tax filings, join Tax Watch and the Westchester Chapter of the New York Society of CPA on Feb. 28 for our third annual Tax Hotline program, from 9 a.m to 1 p.m. Several local volunteer CPAs, led by Robert Winton, of Citron Cooperman's White Plains office, will be manning the phones to answer questions you may have about how the Affordable Care Act will impact your tax liability, or whether there are tax benefits for parents now paying for Junior's college tuition.

The hotline number is 914-694-5077.