Three magic words that most soon to be parents enjoy hearing are “tax dependency exemption.” Typically, those three words mean you may get some money back for that squishy little baby now ruling your lives. While there are usually tax benefits to be enjoyed once you have a child, tax dependency exemption benefits can become rather complicated, for instance, if you should ever separate or divorce your spouse. In certain situations, the Affordable Care Act, also known as Obamacare (ACA), will impact tax benefits for qualifying children of divorced or separated parents in the area of health care coverage.
The ACA is nothing new and has actually been around since 2010 when President Obama signed it. The purpose of the ACA is to make health care more affordable and increase its accessibility to all people. In fulfilling this purpose, the ACA mandates individual taxpayers and their dependent children obtain what is defined as “minimum essential coverage” for health care. The ACA may not be new, but the 2015 tax season was the first time that health care coverage became an issue for individuals and families, as it was the first year that taxpayers needed to prove they carried health care coverage all year. For a large majority of tax filers, it was as simple as checking a box to meet this new requirement; however, things can become complicated if you are divorced or separated and alternate any tax dependency exemptions for your children with your spouse.
Most divorced or separated couples can continue to alternate the tax dependency for the children without an issue, but issues could occur if the parent providing health care coverage for the qualifying child qualifies for the Premium Assistance Tax Credit and purchases health care coverage off of the governmental exchange. For example, if a parent qualifies for the Premium Assistance Tax Credit and purchases health care coverage off of a governmental exchange, they will most likely be receiving a subsidy to help pay for their healthcare costs. If that same parent is then unable to claim the child as a dependent for that particular tax year, they may have to repay that subsidy because they have not claimed a dependent to justify the subsidy itself.
Another scenario is a parent who obtains health care coverage off of the governmental exchange, but pays the premiums throughout the year, without the subsidy. If that parent qualifies for a partial refund of those premiums because they qualify for the Premium Assistance Tax Credit, they will not receive that refund if they do not claim the child as a dependent, thereby losing any refundable Premium Assistance Tax Credit.
Essentially, this equates to a concern that if the party providing health insurance, through the government exchange and also qualifies for the Premium Assistance Tax Credit, is not allowed to claim the children as dependents on their taxes, they may be subject to a penalty. This penalty is commonly referred to as the “individual shared responsibility payment.” There are a number of exemptions to the individual shared responsibility payment; however, it is important to understand that the parent providing health insurance may not qualify for an exemption.
The upside is that this penalty will not result in any criminal prosecution or assessment. The only remedy available to the Internal Revenue Service to recoup any sort of loss is to offset your refund, whether it be the current refund or a future refund. The downside is that you can’t bank on the IRS “forgetting” that you owe them a chunk of your refund because I don’t think they ever forget when people owe them money.
This blog article is for informative purposes only and is not meant to provide you with tax advice. The tax dependency exemption is a very small, but very important, issue that needs to be addressed in any divorce involving children or residential responsibility actions. If you have a family law situation you’d like to discuss, call our Family Law Team at 701-297-2890 or send us an email below.