27 Year Old Student Graduates in May. ACA Penalty while still a student?

[mammondee]

I have a 27 year old single client with no dependents who graduated from graduate school in May, 2016. She is not a dependent on anyone else's return and has filed on her own for several years now. During January to May, she was a full time student and worked part time as a waitress. She averaged $1,800 a month in earnings during that time (tips).

In 2015 she made $27,000 and claims early in 2016, when she looked into Obama Care, she could not afford it. She claims her premium was being calculated on her $27,000 from 2015, and not her current earnings, which were less. She opted to buy "non-qualified" insurance for January through May.

After graduation in mid May, 2016 she started her career and made $3,400/month. For some reason she was not covered by her employer's health insurance until July, and was covered until the end of the year. (Per 1095-B)

Does she really owe the penalty for January - May while she was a full time student, working part time, making what would have averaged out to be $21,800 / year.

Total Income in 2016:
January to mid May - $10,000
mid May to December - $20,000
Total 2016 Income - $30,000

[TaxGuyBill]

Nothing in your post directly indicates an exemption to the penalty. The fact she was a student, and the fact she had low income during the period she did not have insurance, does not exempt her from the penalty.

She MIGHT qualify for the "Unaffordable" exemption. You first need to confirm she was not eligible for employer insurance before July. If that is the case, then fill out the worksheet in Page 11 of the instructions. If she is tobacco user, she probably qualifies for the Unaffordable exemption. If she is not a tobacco user, it may be close.

https://www.irs.gov/pub/irs-pdf/i8965.pdf#page=11

As a side note, when she looked into Marketplace insurance, the premiums would have been based on her 2016 estimated income, not necessarily her current monthly income. So if the cost was based on $27,000, she would have needed to repay part of the credit because her income was higher than that. In the event she reported a number significantly lower than her previously filed tax return, the Marketplace may have asked for 'proof' of income.

[mammondee]

[QUOTE=TaxGuyBill;184987]Nothing in your post directly indicates an exemption to the penalty. The fact she was a student, and the fact she had low income during the period she did not have insurance, does not exempt her from the penalty.

I guess this is the crux of my question. During January to May, she made so much less, it is quite possible she would have qualified for the "unaffordability" exemption. However, I can't find anywhere that will allow me to "annualize" the income, showing $1800/mo for the 1st half of the year and $3,400 in the second half....The worksheets all count total income, regardless of timing.

It seems unfair that while she was in school full time, she really could not afford the insurance, but because of her higher earnings after graduation, she must pay the penalty for January - May.

What should she have done? Should she have contacted the marketplace and asked for an exemption? Is it too late now? She lives in Oklahoma, which is a state that does not participate in the federally funded programs.

[TaxGuyBill]

As you say, it based on the annual income, and it doesn't seem fair. However, that is how it works (one of the many problems that need to be corrected).

In 2014 there was a hardship exemption that could be applied for at the Marketplace based on the month-by-month income (it had to be applied for in advance of the non-insured months), but for some reason that was removed in 2015.

She can check if any of the other exemptions apply, but if not, she owes the penalty for those months.

https://www.healthcare.gov/health-coverage-exemptions/forms-how-to-apply/

[JohnH]

looks like another candidate for an extension.

[mammondee]

looks like another candidate for an extension.

She does not qualify for any hardship or other exemptions. The entire amount she owes on her 2016 federal return is due to the ACA penalty. If she chooses to extend, should she send in the amount due, and then file for refund if the penalty is abolished?

[taxea]

She does not qualify for any hardship or other exemptions. The entire amount she owes on her 2016 federal return is due to the ACA penalty. If she chooses to extend, should she send in the amount due, and then file for refund if the penalty is abolished?

And I would suggest that she write and thank Obama.

[JohnH]

She does not qualify for any hardship or other exemptions. The entire amount she owes on her 2016 federal return is due to the ACA penalty. If she chooses to extend, should she send in the amount due, and then file for refund if the penalty is abolished?

She can do either.

She could pay the estimated amount due with the extension and then claim any overpayment as a refund on the extended return when filed (assuming the penalty is eliminated in the coming weeks or months).

She could also file the extension without payment or with a partial payment - it really makes no difference insofar as the validity of the extension is concerned. The only consequence to not paying the full amount would be a small Failure to Pay penalty and interest, totaling a little less than 1% per month on any unpaid balance.

The main purpose of the extension is to delay filing while avoiding a 5% per month Failure to File penalty. It enables the taxpayer to delay "showing their hand" until the uncertainties are resolved.

[mammondee]

Thank you to all. I have a much better grasp of how to present the options to the taxpayer.