Will Your Affordable Insurance Turn Into a Tax Liability?

While April 15th, 2015 seems a long way off, it will be here sooner than you think. Tax planning in the past might not have been complicated for you, but the introduction of the Affordable Care Act has changed all that; virtually every United States citizen will in some way or another be impacted on their tax returns next year. If you haven't considered what the Act means for you and your taxes, you might be in for a rude awaking on filing day.

2014 signals the first year that the United States government has enforced the mandate, which requires most Americans to obtain personal health insurance. Individuals can choose from government-provided coverage, qualified private plans or employer-provided insurance. If you haven't obtained personal coverage this year, you're subject to a penalty on your upcoming tax returns. In addition, what you file and what you'll have to pay can vary, depending on what choices you've made this year.

The Marketplace

If you've chosen a plan through the federal and state exchanges, otherwise known as the Marketplace, your government coverage comes with several tax considerations. First, you may have taken the option to have an advanced payment for your insurance. This allotment is intended to cover your benefits if you had no other way to pay for them. If this is the case, it's critical that your actual income matches what you reported or you may responsible for paying at least some of the money back come tax season. In the event that you can cover your premium costs throughout the year, it may be safer for you to opt for the tax credit rather than securing an upfront payment.

An important thing to remember about Marketplace coverage is that you're required to keep your living status and personal information current throughout the year. While income changes have to be reported, you're also obligated to update changes in marital status, residence, tax filing status, dependent adjustments and more. You'll want to visit healthcare.gov to learn the full details on your reporting responsibilities.

Private and Employer-Provided Coverage

You can elect a private insurance plan over Marketplace coverage, or accept employer-sponsored benefits as an alternative. Most work-related plans provide coverage sufficient for you to be within the letter of the law, but you will want to confirm this point with your employer. Similarly, you may ask your private insurance representative if the coverage you elected is acceptable to the standards established by the Affordable Care Act. Remember that while you may be compliant with ACA specifications, you will not be eligible for government insurance subsidies unless you obtain Marketplace coverage.

Uninsured Liability

If you have not secured a qualifying insurance policy for 2014, you'll be responsible for making a "shared responsibility payment" – or penalty – on your tax return. For 2014, this penalty is 1% of personal/family income, or $95 per adult and $47.50 per child; what you pay is the income percentage or the dollar amount, whichever is greater. These numbers increase each year, so the longer you wait to obtain coverage, the more you'll spend annually.

Preventative Maintenance

Given the enormous complexity of the healthcare changes and the fact that they are entwined with your annual tax filing duties, you may want to consult a licensed tax professional when it comes time to prepare your return. A tax expert can help ensure you take advantage of any available credit and help prevent you from inadvertently winding up with a tax debt from a filing error. Your insurance coverage doesn't have to lead to a tax liability, as long as you take the proper precautions.

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