Exemptions from health insurance penalty that can be taken at tax preparation time

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January 29, 2015 by Tony Novak

Most income tax filers this year are required to have had health insurance in 2014 or pay a penalty tax. About 70% obtained this insurance from an employer or government sponsored health plan and they simply check a box indicating that they had this required coverage.

For the other 30% who do not check the box, more information is requested. Those who obtained insurance coverage through an online exchange report those details that are contained on Form 1095A from the insurance company or exchange. This article does not cover this procedure.

The remaining group that did not either “check the box” or report exchange coverage on a 1095A either have to qualify for an exemption from the penalty or else pay the penalty.

Most penalty exemptions from the individual health insurance requirement must be obtained from the insurance exchange in advance of tax filing and be supported by a numbered certificate. The certificate number is reported on the tax return to qualify for the exemption. IRS estimates that most people who would have qualified for an exemption did not bother to get a certificate. Perhaps some incorrectly assumed they would qualify for an exemption from the penalty without a certificate. Presumably these people will just pay the penalty anyway but tax preparers are reporting some reluctance by their clients. IRS hinted at ways to make a late application for certificate and possibly avoid the penalty but this topic is not covered in this article.

But there are a few exemptions that can be taken at tax filing time without the certificate. These are reported on Form 8965  Part 2 or Part 3:

The easiest of these exemptions is for those with household income or gross income below the filing threshold. They simply check the box on line 7a or 7b on Form 8965 Part 2. This exemption would be used, for example, by an independent 22-year-old student who earned only $5,000 and would not normally be required to file a tax return but is filing a tax return simply to get a refund of federal income taxes withheld from his paycheck.

Others allowable reasons for the exemption taken at tax filing time are reported in the Form 8965, Part 3 in column C.

These other reasons for an exemption from the tax penalty are reported on column C as a code letter:

– Unaffordable coverage cost was more than 8% of household income (Use code A)

– Short coverage gap of less than three consecutive months (Use code B)

– U.S. citizen living abroad or certain noncitizens (Use code C)

– Member of health care sharing ministry (Use code D)

– Aggregate cost of self-only coverage for two or more family members was more than 8% of gross income (Use code G)

– Low income resident of a state that did not expand Medicaid that would have been eligible for Medicaid if the state offered it (Use code G)

– Gap in coverage at the beginning of 2014, but coverage beginning on or before May 1, 2014 (Use code G)

– Gap in coverage at the beginning of 2014, but CHIP coverage effective in 2014 (Use code G)

– Enrollment in certain limited coverage Medicaid or TRICARE programs (Use code H)

– Enrollment in an employer-sponsored coverage later in 2014 due to non-calendar year plan accounting (Use code H)

The instructions to Form 8965 include detailed procedures to be followed for most of these exemption categories. It strikes me that for 2014 it might cost more to properly comply with the Form 8965 filing instructions than simply paying the tax penalty. For that reason, professional income tax preparers like me are quoting their basic tax return preparation prices without including the cost of preparing Form 8965 or other health insurance forms.

Exemption Tool
To help taxpayers determine if they qualify for an exemption, the Centers for Medicare and Medicaid Services has launched a health coverage exemption tool at HealthCare.gov. This tool will give results for both exemptions granted from the Marketplace and for exemptions that should be claimed on the tax return.

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