ACA Reporting Dilemma

[deserttax]

A client, who filed her own return, received a letter 12C stating that the dependent she claimed received a premium tax credit in 2015 but no 8965 was included in her e-filed return. It's an interesting situation and I am having a little trouble on how to resolve it. Her situation is as follows:

The client is divorced with one child. The client has joint custody of the child where she and her ex claim the child every other year, whereas she can claim the child in odd years and her ex claims the child in even years. The client claimed the child in 2015 and rightfully so. The client basically has the child 4 nights/week sometimes 5 which is approx 60% of the time and is considered to be the custodial parent. The client signs a 8332 in the years the ex can claim the child. In the divorce decree, the ex is responsible for providing health insurance for the child. The ex got health insurance through the federal exchange/market place for 2015. He included the child on his health policy and was able to receive a premium credit even though he reported that he wasn't claiming the child in 2015 but I believe reported the child was part of his household for just under six months. The ex has received a 1095-A but hasn't filed his return yet. The client says the ex normally files an extension.

So, my questions in a nut shell are:
1) How should the 8965 be reported by the client so that she is not hit with a shared responsibility payment penalty?

2) Conversely, the client asked, how does the ex report his 8965 so that he doesn't get hit with having to pay back the premium credit since he was the one paying for the insurance for the child for which the child was part of his household for 40% of the year?

I suspect there are many taxpayers with this situation and wonder what is the proper way of handling it. Thanks in advance for any advice/comments/solutions you can provide to this situation.

[David1980]

Sounds to me like you're talking about 8962 not 8965.

Form 8962 has nothing to do with any penalties. There could however be a repayment of excess advance payment of premium tax credit received. But not a penalty. If someone in taxpayer's family didn't have insurance at some point in 2015 there might be a shared responsibility payment or 8965. That's something separate from dealing with the APTC received for the child.

This is a shared policy allocation. See 8962 instructions pages 14-17. https://www.irs.gov/pub/irs-prior/i8962--2015.pdf I think this situation falls under Allocation Situation 4. If taxpayer and ex agree, they can allocate the 1095-A from zero through one hundred percent. They could for example allocate 100 percent to the ex and 0 percent to taxpayer. Taxpayer would file an 8962 with 0% listed in Part IV and no amounts in Part II. Ex would file with 100% in Part IV and 100% amounts in Part 2. If they went with 100% and 0% that is. If they can't agree it's based on the number of people claimed on the tax return covered by that policy divided by total number covered by the insurance policy.

[deserttax]

ACA Reporting Dilemma

I stand corrected; form 8962. 8965 is for coverage exemptions. Thanks for the info. As a hypothetical, what if the ex provided only 5 mos of insurance via the federal exchange and the client provided insurance for the other 7 mos through her employer. I assume the ex would have an allocation of 100% for 5 mos, ex at 0% and the client would have an allocation for the other 7 mos at 100% and the ex at 0%? I ask only because I can see a myriad of scenarios. Thanks again David.

[kathyc2]

I think I may have a similar situation that I messed up on. My client claims his daughter every other year, but is required to provide insurance. Since he didn't claim her this year, I should have completed Part IV. The way I'm reading the instructions is that I would enter the ex's SSN rather than the daughters? This seems illogical to me. Also, if my client allocated 100% to himself, does the ex need to report anything on her return other than declaring that the daughter was covered? Is the best way to correct this to have my client send a 1040X with no numbers changing and a correct 8962 rather than just sending the corrected 8962 with a letter?

[deserttax]

ACA Reporting Dilemma

@David, after reading the instructions for 8962, I believe both the client and her ex would need to complete Part IV rather than Part V. They were divorced before 2015. Thanks for pointing me in the right direction.

[David1980]

I stand corrected; form 8962. 8965 is for coverage exemptions. Thanks for the info. As a hypothetical, what if the ex provided only 5 mos of insurance via the federal exchange and the client provided insurance for the other 7 mos through her employer. I assume the ex would have an allocation of 100% for 5 mos, ex at 0% and the client would have an allocation for the other 7 mos at 100% and the ex at 0%? I ask only because I can see a myriad of scenarios. Thanks again David.

The shared allocation percentages are in the instructions - for this one I used "Allocation Situation 4" - https://www.irs.gov/instructions/i89...2.html#d0e3423

What you suggest seems fair and makes sense. Which of course means it's not what the law requires. They can of course agree to anything between zero and one hundred percent (in this allocation situation) so if taxpayer and their ex both like doing it that way you're good to go. The problems arise when there isn't an agreement, in that situation you use the allocation percentage the instructions tell you to use. Even if it doesn't seem fair.

I suspect that a lot of the time it's beneficial to both sides of these shared policy allocations to agree to a 100%/0% allocation when possible. The lower income taxpayer is less likely to have any repayment and might even qualify for additional credit - so allocating 100% to the lower income taxpayer is great a lot of the time. Not always though, and probably sometimes you get disagreeable people who won't agree to a different allocation than the default just because they dislike their ex or whoever.

[David1980]

@David, after reading the instructions for 8962, I believe both the client and her ex would need to complete Part IV rather than Part V. They were divorced before 2015. Thanks for pointing me in the right direction.

Yes right, Part V is the alternative calculation in year of marriage and part IV is the shared policy allocation. Sorry!