Health law means changes for tax filing
Posted January 13, 2015
Updated January 14, 2015
WASHINGTON — President Barack Obama's signature health care law will bring a new twist to tax-filing in 2015, a year in which much else will seem familiar when you're working on your return.
"It's been a very quiet season or tax year" in terms of congressional action, says Bob Meighan, vice president of customer advocacy at TurboTax, the tax-preparation software company.
Sure, there have been adjustments for inflation in the tax tables, standard deduction and value of each exemption. But what could have been a stunner – the expiration of a series of popular tax breaks – was forestalled by Congress in a last-minute move before it adjourned last month.
Unlike last year, there will be no delay to the start of the tax season, despite the late congressional passage of the tax extenders. The Internal Revenue Service said it would begin accepting electronic returns and processing paper ones as scheduled on Jan. 20.
"We have reviewed the late tax law changes and determined there was nothing preventing us from continuing our updating and testing of our systems," IRS Commissioner John Koskinen said in a statement.
So gather up those W-2s, 1099s, receipts and other data needed to file; you have about three months. The deadline remains April 15, although extensions are possible.
If you're due a refund, however, you might be in for a wait.
Noting that "people have gotten very used to being able to file their return and quickly getting a refund," Koskinen said at a news conference in December that "this year we may not have the resources, the people to provide refunds as quickly as we have in the past."
He blamed budget cuts and declined to predict how long refunds would take. In previous years, it was about 21 days for those who filed electronically.
Last year, the IRS processed nearly 150 million individual tax returns, up about 1 percent from 2013. The average refund was $2,792.
Electronic filing continues to gain popularity; only about 16 percent of last year's returns were on paper.
"Filing electronically is the most accurate way to file a tax return and the fastest way to get a refund," the IRS said.
The biggest change for tax filers this year concerns the Affordable Care Act and the requirement that everybody have health insurance.
"The first year truly will be the hardest" in dealing with ACA, said Dave Duval, vice president for consumer advocacy at TaxAudit.com.
If you got insurance through an employer, from the private marketplace or through a federal or state exchange without a subsidy, you simply check a box on line 61 of Form 1040 affirming that you had full coverage.
"You don't send in documents for review," said Greg Rosica, tax partner at Ernst & Young.
But there are new forms to deal with, from the exchanges confirming your coverage and from the IRS.
Anyone who purchased coverage through the federal HealthCare.gov marketplace or a state-run exchange and received a subsidy to offset some or all of their premiums will receive Form 1095-A in the mail. It;s basically a W-2 for health care, listing family members who had subsidized coverage and how much the government paid. The information on the form is needed to fill out a return, but unlike a W-2, the form itself doesn't need to be filed with the return.
More than 230,000 people in North Carolina obtained insurance through the marketplace last year, and federal officials said more than 434,000 have already signed up this year with about a month left in the enrollment period.
Form 8962 will help determine if you got the right advance payment of the premium tax credit or if it was too large because you underestimated income or had a life change, such as a new job with a higher salary. In that case, you might have to pay back some or all the advance payment. If you lost your job, you might be entitled to more in the form of an additional tax credit.
"This year, many people did not go back to update their information," said Kathy Pickering, executive director of the Tax Institute at H&R Block.
"There are many circumstances that can change," said Richard Reedman, an enrolled agent who can represent taxpayers before the IRS. "People can have increase in salary, lose their job, get married, have children. There are many factors that would change the amount of the premium tax credit."
Form 8965 will help you figure out whether you qualify for an exemption to the mandatory health coverage and can avoid a penalty. Tax experts advise people who didn't have coverage to look through the list of more than 30 coverage exemptions.
People who didn't get coverage and don't qualify for an exemption will have to pay a penalty of $95 or 1 percent of their yearly household income, whichever is greater.
Penalties and lower subsidies could lead to a larger tax bill or a smaller refund.
"We are working to ensure that, whatever their experience, consumers can easily access clear information, since this is the first year they will see certain changes to their tax returns" because of the health care law, Treasury Secretary Jacob Lew said in a statement.
"My advice is to be prepared, understand what needs to be done and seek advice from an enrolled agent, if you can," Reedman said.
Tax rates for 2014 remain the same as in 2013, ranging from 10 percent to 39.6 percent.
But the value of a personal exemption edged up slightly, to $3,950, because of inflation, and the standard deduction is now worth $12,400 for married people filing jointly, $9,100 for heads of households and $6,200 for single taxpayers.
The patch on the alternative minimum tax holds, also adjusted for inflation to prevent more middle-class people from being drawn in.
The legislation passed by Congress in December extends a series of popular tax breaks that help a broad range of taxpayers, from schoolteachers to college students and their parents, residents of states without income taxes and people who made energy-efficient improvements to their home. People who had debt forgiven on bad mortgages usually will not have to consider that as income. And required IRA distributions by seniors 70½ and older directly to a charity are tax-free.
Some affluent taxpayers could be in for sticker shock because of a surcharge on investment income, said Meighan, of TurboTax.
"It's exacerbated by the market being at record levels. People who are buying and selling are likely to see very large gains," he said.
At the other end of the wealth spectrum, he said, "people who most need the money" are overlooking things like the earned income tax credit. About a quarter of those eligible are not claiming it, he said.
The IRS says that more than half of taxpayers hire a tax preparer to do their returns, and the agency urges caution in choosing one. Check preparers' credentials, and make sure they have an IRS preparer tax-identification number and file electronically, the agency says. "Never sign a blank return" and be wary of those who promise large refunds, it advises.
What about dealing with the IRS itself?
The agency has adopted a Taxpayer Bill of Rights covering 10 principles, from the right to get quality service from the IRS to the right to appeal IRS decisions, including penalties. The final principle covers the "right to a fair and just tax system."
National Taxpayer Advocate Nina Olson, whose agency helps taxpayers navigate dealings with the IRS, commended the agency for adopting the bill of rights.
"If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply of their own volition," she said in her semiannual report to Congress last summer. "By contrast, taxpayers will be more likely to comply if they have confidence in the fairness and integrity of the tax system."
IRS Publication 17, Tax Guide 2014 for Individuals: http://www.irs.gov/pub/irs-pdf/p17.pdf