H&R Block finds tax return exemptions key to avoiding ACA penalties

June 17, 2016

While penalties more than double, 95 percent of exemptions were claimed during tax filing process

For a second consecutive year, H&R Block, the world’s largest consumer tax preparation company, has continued to help millions of clients comply with the tax provisions of the Affordable Care Act (ACA). Many of these clients saw their refund significantly impacted this past tax season. Based on 2016 tax season cumulative tax return data for both H&R Block’s assisted and do-it-yourself tax filers, the data shows:

  • H&R Block found 95 percent of those who qualified and filed for a penalty exemption (IRS Form 8965) claimed a tax return exemption instead of using the Marketplace exemption process. This saved them valuable time and money.
  • Thirty-seven percent overestimated their income at the time of applying for the APTC this season and therefore received an additional $526 on average. Last year about 1 in 4 received an additional $425 on average.
  • Six in 10 taxpayers who received insurance via the state or federal Marketplace paid back an average of $716 of the Advance Premium Tax Credit (APTC), which equated to a 38-percent reduction from the average refund. Both amounts are similar to the end-of-season results in 2015 of 62 percent paying back an average of $729.
  • The average ACA penalty more than doubled from $178 last year to $401 this tax season – a 125-percent increase.

“We were able to get the vast majority of our ACA-impacted clients an exemption as we were preparing their taxes. This speaks to the value of our trained tax professionals who can help taxpayers understand their options and how best to maximize their tax return,” said Bill Cobb, H&R Block CEO. “We know that income volatility and life changes impact the tax return. Combine that with the impact on health insurance coverage and we have ongoing disruptions on a potential tax refund.”

Cobb notes that even those who previously had been covered and received an APTC incorrectly estimated income for future APTC payments at a similar rate as those claiming APTC for the first time.

Tax season 2017 outlook – More of the same as IRS compliance efforts increase

Administration issues were at a minimum this season as the IRS, Health and Human Services and Centers for Medicare and Medicaid Services seemed to have avoided any major issues they experienced in Year 1 of this program, according to Mark Ciaramitaro, H&R Block’s vice president of healthcare and tax services. That highlights the efficiency of which the IRS may be able to seek ongoing compliance, he said.

This past tax season was the first the IRS and all taxpayers with health insurance – either through a Marketplace, private insurer or their employer – received an information document indicating coverage (1095-A, 1095-B or 1095-C). While it is still early in the post-filing landscape, we believe IRS compliance efforts will increase over time, Ciaramitaro said.

“Taxpayers should understand that any noncompliance now or in the future can continue to impact any future refunds,” Ciaramitaro said. “The benefit of working with experienced tax professionals and ongoing tax planning will help protect refunds or defend taxpayers should they receive an IRS notice.”

Year 3 of the ACA and taxes will see yet another increase in the penalty for not having health insurance. Next year, that penalty increases to 2.5 percent of household income (from 2 percent this year) or $695 per adult (from $325 this year) whichever is higher. That means a family of four who qualify for coverage earning $60,000 annually would see their penalty increase from $400 this season to $975 in 2017.

“As we have done for more than six decades, H&R Block will continue to help clients understand how to maximize their tax refund,” Ciaramitaro said. “For those who have insurance through the marketplaces or for those facing penalties, our trained tax professionals can be a valuable lifeline.”

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