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Tax returns need full disclosure on health coverage

Erick F. Torres, senior tax manager at Nussbaum

Erick F. Torres, senior tax manager at Nussbaum Yates Berg Klein & Wolpow, poses for a portrait with tax forms pertaining to health coverage exemptions and premium tax credits in Melville Wednesday, Jan. 28, 2015. Credit: Barry Sloan

Accountants are happy, but you may have a look of dread on your face. Tax season is here, and for the first time, folks will have to reveal their health care status to Uncle Sam when they file. Did they comply with the Affordable Care Act's requirement to have health insurance, or did they ignore it? It's truth-telling time.

What kind of headache might be in store?

Most people will only need to check a box on their federal tax return stating they were covered for all of 2014. It's simple when you've met the requirements. "Don't let a tax preparer or accountant say they need to do some sort of analysis and charge you a fee for doing so," warns Erick Torres, senior tax manager with Nussbaum Yates Berg Klein & Wolpow, an accounting firm in Melville.

"If you didn't have coverage for the full year, or at all, see where your exposure is," Torres says.

Two scenarios

There are two scenarios in which you might owe Uncle Sam: You failed to purchase coverage and will have to pay a penalty, or you purchased coverage but received a bigger government premium credit than you were due because you earned more than you estimated.

If you didn't have coverage, you must either pay a Shared Responsibility Payment (the penalty), or qualify for an exemption.

"Many people will be surprised. They think their penalty will only be $95," says Chuck Lovelace, vice president of the Affordable Care Act at Liberty Tax Service in Virginia Beach, Virginia. But it's actually the greater of 1 percent of their taxable household income or $95 per adult ($47.50 per child), to a family max of $285. Lovelace estimates some 30 million Americans may owe a penalty if they don't qualify for an exemption.

The penalty will be subtracted from any refund they're owed; those who don't have a refund coming will need to write a check to the IRS like any other taxes owed.

Those who bought insurance through the state exchange, New York State of Health, will receive Form 1095-A early this month. You can also print it out from your account on the exchange.

"The 1095-A is akin to the W-2 Form, except it shows your monthly health insurance premiums, including what you paid and what the government paid on your behalf to your health plan to help lower the cost of coverage," says Lisa Zamosky, health care correspondent and TurboTax blog contributor in Los Angeles.

The form contains information essential to complete the Premium Tax Credit Form 8962, used to claim your premium credit or to calculate what you owe if you received an advance payment over the credit allowed; this may have occurred if you earned more than you estimated when you signed up for coverage.

Any excess advance premium credit is added to your federal income tax liability, says Gary Edelson, a partner in the Philadelphia law firm of Montgomery McCracken, while "a net premium credit is an offset to one's tax liability."

For those who didn't purchase coverage, there's Form 8965, Health Coverage Exemptions, where you either claim an exemption or compute the penalty you owe. That figure is then added to the amount due on line 61 of Form 1040 or the equivalent line on 1040EZ.

"Don't pay the penalty unless you have to," says Kevin Hopson, CEO of online tax prep software company TaxPoint, in Southlake, Texas.

See if you qualify for an exemption. Plenty of things will get you off the hook, such as being uninsured for less than three months or having experienced a hardship. For more, go to HealthCare.gov/taxes/tools.

Avoid mistakes

If you must deal with Forms 8965 and 8962, don't go it alone. "They are very confusing, and the instructions are 12 to 15 pages each. These will be difficult for ordinary taxpayers who prepare their own returns to understand," says Denise Mummert of the Atlanta accounting firm Windham Brannon.

And don't wait until the last minute to file. Mike Greenwald, corporate and business tax practice leader at Friedman LLP in Manhattan, recommends spending time on the IRS website: "A little research goes a long way."

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