IRS Finalizes Premium Tax Credit Rules Virtually Unchanged

On July 24, 2017, the Internal Revenue Service finalized proposed and temporary regulations governing Affordable Care Act (ACA) premium tax credits that had been issued in July of 2014. Except for one minor technical change, the 2014 proposed and temporary rules are adopted unchanged. The temporary regulations were apparently about ready to expire. The preamble to the regulation rejects a number of suggestions to extend the earlier rules, but does so in a calm and reasonable manner that is almost jarring given the current inflamed rhetoric surrounding the ACA. Until the ACA is amended, it is still the law of the land and the IRS is going to make it work.

Spousal Abandonment And Domestic Violence

Several of the rule’s provisions address situations involving spousal abandonment or domestic violence. The ACA requires married couples to file a joint return as a condition of receiving premium tax credits. This is often not possible, however, if one of the spouses is a victim of domestic violence or has been abandoned by the other spouse, who cannot be located.

In accordance with the earlier temporary rules, the final regulations allow married victims of domestic abuse or spousal abandonment to claim a premium tax credit without filing a joint return if the taxpayer files a married-filing-separately tax return and the taxpayer (i) is living apart from his or her spouse at the time of filing the return, (ii) is unable to file a joint return because of the domestic violence or abandonment situation, and (iii) indicates on his or her return that this is the case.

Domestic violence is defined to include “physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim’s ability to reason independently,” and is determined considering all facts and circumstances. An individual qualifies as a victim of spousal abandonment if the individual is abandoned by his or her spouse and is unable to locate his or her spouse after reasonable diligence. Individuals cannot qualify for relief from the joint filing requirement for more than three consecutive years, during which time they must presumably obtain a divorce.

A number of commenters asked the IRS to further define “reasonable diligence” and to broaden the definition of “unable to locate” to include situations where a spouse was uncooperative. The IRS decided to retain a facts and circumstances approach and noted that situations where refusal to cooperate rose to the level of psychological or emotional abuse the situation would qualify as domestic violence.

The IRS also decided against adopting several suggestions that it extend relief from joint filing to include other situations, such as same-sex partners in states that do not permit them to divorce, incarcerated spouses, or spouses living abroad, since joint returns are not impossible in these situations. The agency additionally rejected a proposal that spouses who are victims of domestic abuse be allowed to file separately even if they have not yet left their spouses at the time of filing.

The preamble clarifies that married people who are able to file separately are not ineligible for premium tax credits because they may have been eligible for their spouse’s employer coverage but refused to enroll in that coverage. The IRS rejected proposals to allow spouses who are victims of domestic violence, but who reconcile with their spouses, to use premium tax credit reconciliation rules that can be claimed by people who marry partway through a year; the agency noted that determining when spousal reconciliation occurs is more difficult than determining the date of a marriage and that such a rule would be subject to gaming.

The IRS rejected the suggestion that relief from the joint filing rule should be allowed for more than three years, noting that experience to date demonstrates that the three-year period is sufficient. It also reaffirmed guidance that spouses who are victims of domestic violence or abandonment who claim unmarried status on their marketplace applications, as they are instructed to do by the federal marketplace, and then file taxes as married filing separately will not be subject to penalties for the inconsistency. Finally, the preamble notes that the Department of Health and Human Services (HHS) provides a special enrollment period for spouses who are victims of domestic violence or spousal abandonment.

Allocation Rules

The regulations provide allocation rules for situations where premiums, the premiums for an applicable benchmark plan, and advance payments for a qualified health plan must be allocated between two or more taxpayers. This can happen when married individuals file separately or when married individuals divorce or separate during a taxable year. It can also happen when a family member (referred to as the shifting enrollee, usually a child) is enrolled in a health plan by one taxpayer (the enrolling taxpayer, usually a parent) who receives an advance premium tax credit for the family member, while the shifting enrollee is ultimately claimed as a dependent for tax purposes by another taxpayer (the claiming taxpayer; usually the other parent).

When divorces or separations or shifting enrollee situations are involved, the affected taxpayers may agree on allocation percentages, as long as the same allocation percentage is applied by both. If there is no agreement, however, divorced or separated taxpayers must allocate 50 percent of premiums, benchmark plan premiums, and advance tax credits to each spouse, as long as both are enrolled.

In shifting enrollee situations, the percentage applied is equal to the number of shifting enrollees claimed as a personal exemption deduction by the claiming taxpayer divided by the number of individuals enrolled by the enrolling taxpayer in the same qualified health plan as the shifting enrollee. Married taxpayers who do not file joint returns must allocate premiums and advance credit payments 50-50 unless the payments cover a period in which a qualified health plan covered only one of the spouses or his or her dependents. Commenters suggested other approaches to allocation, but the IRS noted the rule had been in effect since 2014 and decided to leave it alone.

One Change In Advance Premium Tax Credit Repayment Limitations

Finally, the final IRS rule makes one technical change in the 2014 temporary rules for determining advance premium tax credit repayment limitations. Self-employed people who receive tax credits may deduct the premiums that they pay beyond amounts covered by premium tax credits. The deduction, however, is limited to the amount that an individual earns from self-employment.

The final rule describes the methodology for calculating the household income for a person who can claim such a credit for purposes of determining the applicable limitation on the amount the individual may have to pay back, in the event he or she receives an excessive tax credit. The technical change adjusts the rule to reflect the fact that, as noted, a self-employed individual may not claim a deduction exceeding self-employment income.

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