Health Insurance Tax Credit for 2014

Originally published in the Cedar Street Times

December 13, 2013

You have probably heard that there is a possible tax credit for the new health insurance requirement that takes effect January 1, 2014.  If you have health insurance available through your employer that does not exceed 9.5% of your household income (for your single coverage alone, exclusive of your family), or you have certain government plans like Medicare or Medicaid, you are not eligible for the credit.  For others that can go through Covered California, our state health insurance exchange, your income will determine your eligibility.  It is important to know the income thresholds for your family size because the poorly designed structure of the credit could mean the complete loss of the credit if you are even $1 over the threshold.

For instance, a family of four which includes a mother and father age 45 and two children in high school with total household income of $94,199 (using 2013 figures) in Pacific Grove, California, would qualify for a $629 per month tax credit, or $7,548 for the year.  If they made $1 more of income, $94,200, they would receive absolutely nothing.  This being the case, they would be better off taking an extra three or four weeks of unpaid time off from work, just to be able to qualify for the credit!

The credit is available to households making as much as four times the federal poverty line.  If you make under the poverty line you are not eligible for the credit, but eligible for Medicaid (MediCal in California) instead.  If you make between 100% and 400% of the federal poverty line, the credit is determined on a nice sliding scale based on your income, age, zip code, and family size.  The problem is that there is a cliff once you get over 400% that makes you completely ineligible for the credit.  The 2014 poverty line figures are not yet released, but can be found at http://aspe.hhs.gov/poverty/figures-fed-reg.cfm when available.

Using 2013 information, the critical thresholds at 400% are as follows based on the number of members in the family: one family member – $45,960, two family members – $62,040, three family members – $78,120, four family members – $94,200, five family members – $110,280, and adding $16,080 for each additional family member.  California residents can visit https://www.coveredca.com/shopandcompare and enter in their family size, age of adults, zip code, and expected household income to determine the tax credit and premium options for the state healthcare exchange very easily.

The family size includes you, your spouse, and your dependents (whether or not actually related).  Household income includes the income for you and your spouse (if married, you must file a joint return to get the credit), as well as any income of dependents IF those dependents had a filing requirement ($6,200 of earned income or $1,000 of unearned income in 2014).  Although there is not a lot of clear guidance by the IRS at this point, it appears if they are under the filing requirement, none of their income is counted (this is another cliff!).  This means you would need to make sure your dependents do not make over these amounts if it would push you over the threshold.  More specifically the income included for you and your dependents is your adjusted gross income modified to include any tax-exempt income, nontaxed Social Security benefits, and any foreign earned income excluded.

Based on your 2012 income, you may be eligible to receive advance payments on your credit.  However, this will be reconciled on your 2014 tax return, and you will either have additional funds paid to you, or worse, have to pay back (subject to a cap) some or even all of the credit if it turns out you were ineligible based on your actual income in 2014.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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