By Joseph Smith @ Travel Tax

June 15, 2015

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Talking Taxes: ACA Tax Credits

In the last article we looked at the Health Insurance mandates and how the penalties apply when there are gaps in coverage which is a common problem for healthcare Travelers. In this article, we will look at the mechanics of the ACA tax credits that are available to certain taxpayers who use the exchanges.

The tax credits are designed to offset health insurance premiums of policies procured through the exchanges or through a private source in which the same exchange policies are purchased. The credit is prospectively granted based on anticipated income but retrospectively adjusted on the tax return for that year.

The Credit

Eligibility for the credit is based on income reported on the previous year’s tax return. When you file your 2014 tax return, an additional form will be used to calculate the amount of credit that you are eligible for to offset 2015 health insurance premiums due to exchange based policies. This formula then goes through two steps: 1) your income on the 2014 return must be below 400% of the Federal Poverty Line and 2) your insurance premiums must exceed 9.5% of your income. In essence, the ACA is a 9.5% tax on earnings per the landmark Supreme Court ruling.

The Payback

There is another calculation going on in the background. Since the credit for 2015 is based on the income reported on the 2014 tax return, the income you report on the 2015 tax return will be used to reconcile the credit that you received. If your income is higher in 2015 than the 2014 baseline year, you will pay back the excess credit in the form of an additional tax on your 2015 tax return. If your income is lower than the 2014 baseline year, you will receive an additional credit which will be applied to the 2015 tax return.

See Saw

This seesaw of credits and paybacks adds another layer of complexity to annual tax return when we one holds and exchange based health insurance policy. Some taxpayers will be required to pay back a significant amount of credits that they received in the previous year. To illustrate, assume a traveler has difficulty finding work in 2014 and is eligible for credit. In 2015, they work a full year. On the 2015 tax return, a portion of the credit (or all) will be charged as an additional tax. If the refund is not large enough to absorb this additional tax, the traveler will have an amount due on the return. As you can see, things might get pretty messy.


Would you like to learn more?

Check out the TOP 10 Questions for Travel Nurses on Taxes.


By Joseph Smith @ Travel Tax

January 20, 2015

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ACA Tax Implications for Travelers

Guest Article provided by: Joseph Smith @ Traveltax.com

ACA (aka “Obamacare”) requires all individuals carry health insurance starting with the 2014 tax year. Here is some information on ACA tax implications for travel nurses:

Since travelers are highly susceptible to gaps in employment, they are more likely to be subject to the penalties assessed for the lack of coverage. Additionally, travelers who intend to use the health insurance exchanges and associated tax credits will have difficulty predicting their subsidy due to the income swings that occur with their various contracts.


ACA Tax Implications

The next series of articles will look at the ACA mandate and its impact on travelers by first focusing on how penalties for non-compliance are assessed. In the next installment, we will look at the mechanics of the tax credits that are available to those who procure health insurance from the exchanges.

Penalties

The penalty for not carrying qualified health insurance coverage starts in 2014 at 1% of income or $95, whichever is greater. In 2015, the penalty rises to $325 per person or 2% of income; and in 2016, $695 or 2.5% of income. The penalty applies for any month that an individual is not covered and is prorated if the individual fails to carry insurance less than 12 months of the year. Since travelers run the risk of losing employer based health insurance during the periods between assignments, they are subject to the penalty unless they procure another policy or continue the policy provided by the last employer through COBRA.

GAPS in Coverage

Under the ACA regulations, if an individual has coverage for one day in a month, they are credited as having coverage the entire month. This potentially allows a traveler to gap coverage for nearly two consecutive months so long as the coverage ends and starts in each month. Some health insurance providers follow a calendar month cycle, meaning that coverage continues until the last day of the month even if a traveler finishes an assignment in the first week of the month.

Exemption for Gaps in Coverage

Though the penalty applies for any month an individual does not have coverage, there is an exemption available for those whose coverage gap is less than three consecutive months. This exemption is only allowed once a calendar year so if the exemption is used in the early part of the year, it cannot be used again in the latter part. If there is a second gap in coverage during the calendar year, a separate “hardship exemption” can be requested. “Hardship” exemptions include a number of specific situations including a death of a family member or bankruptcy filings; however, most all of them require some form of documentation. Hardship exemptions are filed separately from the annual tax return unlike the regular exemptions.

Since the ACA regulations incorporate a one day = one month convention, a traveler could have almost 5 months of coverage gaps and still qualify for the exemption, so long as the coverage ended sometime during Month 1 and coverage with a new policy began in Month 5.

Coverage gaps that extend through one calendar year and into the next have a specific counting rule.

If a traveler does not carry coverage the last two months of the year, when they file their tax return for that year, they report a two month gap in coverage which would qualify for a regular exemption. The counting for the second year incorporates the previous year end gap.

EXAMPLE: If the traveler continues without coverage for the first two months of the second year, they will be considered to have a gap in coverage for 4 months in that year and be subject to the penalty. A peculiar situation can arise when a traveler gaps coverage in November, December and January. For the first year, there is a two month gap which is covered under the regular exemptions. For the second year, the gap is a three month gap, again, covered under the regular exemptions; however, since the regular exemption is used, a subsequent second gap in that calendar year requires a hardship exemption.

Filing Taxes

Since ACA compliance disclosure is incorporated in the annual tax return filing, it adds another layer of complexity to set of forms required with each return. Most taxpayers will receive Form 1095 that evidences health insurance coverage. An additional form currently being developed will be used to report the information on the 1095 series forms when the return is filed. Search and download forms HERE.


Would you like to learn more?

Check out the TOP 10 Questions for Travel Nurses on Taxes.