No one likes surprises, least of all tax surprises. Employees who signed up for individual health insurance through a health insurance exchange, and who took the advance premium tax credit on a monthly basis, may be in for doozy of a tax bill, after they reconcile those advance credits with their eligibility for the actual credit on their 2014 Forms 1040.
With four months left to go in 2014, you can help employees get a handle on this unexpected tax liability.
Time to reconcile. Eligibility for the premium tax credit is based on household income. It can be taken up front, as a monthly advance paid by the federal government to the insurer, or claimed as a credit against employees’ income tax liability on their 2014 1040s. Under final regulations, exchanges must file information returns with the IRS on a monthly and annual basis to report information related to the credit. Enrollees will also receive information returns by Jan. 31, 2015. (79 F.R. 26113, 5-7-14)
The exchange application asks enrollees to estimate their household income for the prior month and the advance credit is based on that estimate. Employees whose household income ends up exceeding their estimate—maybe they have a side business—were advised all along to contact the exchange to update their information; their advance credit will then be recalculated. But they probably didn’t, because the extra money wasn’t consistent enough.
Employees who underestimate their household income must pay back the advance credit and will owe more income taxes when they file their 2014 1040s. Employees may mitigate the negative impact of their underestimation by increasing their withholding for the remainder of the year.
BE A HERO: An email to employees reminding them that they may refile their W-4s to increase their withholding through December will help them get a grip on this new tax liability.