President Trump signed an executive order on the day he was sworn in directing the Secretary of Health and Human Services and the heads of all other executive departments to use the authority and discretion they have under the law to waive, defer, or grant exemptions from any cost, fee, tax penalty, or regulatory burden on individuals and businesses.
So what does this mean for individuals when filing their 2016 income tax returns? At this moment, it is unlikely that the order will affect the Excess Premium Tax Credit Repayment on 2016 returns, but it may be easier to get an exemption approved for the Shared Responsibility tax.
The Excess Premium Tax Credit Repayment is easily the largest penalty a taxpayer could face if they purchased health insurance through the Marketplace. You may have to repay the total advanced premium credit you received if your Modified Adjusted Gross Income (MAGI) exceeds 400% of the federal poverty level (FPL).
Many taxpayers are surprised by this penalty. In their minds, they purchased health insurance as required, paid the premiums they were billed, and now they have to pay it back! Yes, if your income on your tax return is higher than the amount you stated on your health insurance application, you will have to pay back all or a portion of the subsidy you received.
If your income is less than 400% of the poverty level, your repayment is capped at $1,275 for single taxpayers and $2,550 for married couples and heads of households. If your income is over 400% of the poverty level, you will have to repay 100% of the excess premium.
Does the executive order give HHS the authority to tell the IRS not to collect the excess repayment penalty based on the penalty causing a financial burden on the taxpayer? This is not clear at this time, and probably won’t be clear before you have to file your tax return.
The Shared Responsibility Payment penalty (better known as the individual mandate) is a tax on those who do not have health insurance and do not qualify for an exemption. Based on the executive order, it should be easier to get an exemption to this tax based on general hardship or an exemption claiming that the coverage was not affordable under the smallest of excuses. But we really won’t know until HHS and the IRS issue new rules based on the new executive order.
So what should the taxpayer do if they are subject to either of these taxes? I will be recommending to my clients that they file an extension and wait for the new rules to shake out.
Of course, there are a couple of reasons you may want to file your return now and amend later when HHS and the IRS issue new rules. First, you should file if you are still getting a refund after the penalty and need your money now. Second, if you owe a tax payment with your return, you should consider filing and paying the tax in order to limit non-payment penalties and interest on the balance due.
As always, stay in touch with your tax preparer and keep an eye out here for further developments. 2017 promises to be a year with many changes for taxpayers.