February 15th, 2021
Tom talks through a couple of examples of allocating marketplace premiums within a family. We hope this brief video blog is something you can listen to in between client appointments to get a little new information or perhaps just a refresher.
by Tom O’Saben, EA
So what we’re going to talk about now is we’re gonna talk about the allocation of marketplace premiums. And I put in the title, not what you or I might think. And let me tell you, and I’ll apologize at the beginning to say that some of what I have to talk about might be second nature to some of you. Others, you might be in the same boat as me. I’ll be totally honest with you: I don’t deal with a lot of premium assistance and allocation of marketplace insurance and all that. Sure I see my fair share of 1095As. But I really don’t see all that many complicated or different situations. What I want to talk to you about and what I ran into, in this circumstance, is where we have marketplace insurance that is purchased and is allocable between two families. And you think “well, how can that be?” Well, I’ll tell you what it is. You’ve got mom and dad, they go out and they buy insurance on the marketplace. They include their adult daughter who’s not their dependent, but can be covered on their insurance. Why? Because she’s under the age of 26. So, she lives out on her own and makes her own money. But it made sense for whatever reason for them to go ahead and have the coverage happen within the family. So I’ll tell you this hypothetical situation of what happened with me, and what I thought I was doing correctly, until we got some new staff this past tax season or this tax season, which gave me some education. So let’s go back to 2018 when we’re talking about about this circumstance. So clients bring in their information, we meet and everything. They’ve got their 1095A. I see mom and dad and I see the daughter listed on there. So like I would have always done I just do their thing. And I’ll tell you that this taxpayer has a very large net operating loss coming forward from years way before TCJA. So we have no TCJA or CARES Act, impact of the NOL…don’t go there. But we go ahead and we do our thing. And the parents are happy and all that.And we do the daughter’s return, and everything seems good. Well, a couple weeks later, a very unhappy daughter contacts me. And instead of having the enjoyment of the refund she was looking for, she said she got a letter from the IRS indicating that in fact, she had marketplace insurance, and they need the Form 8962. I think many of us have seen those forms come in. And what’s our reaction? Mine was exactly the same as yours: went to the daughter and said, “Where’s the 1095A?” She says, “Let me call mom.” She calls Mom…mom calls me. Mom says “Tom, that was with all of our paperwork.” And I went uh oh, I’m going to have to pick out the daughter’s portion to allocate to her. So there’s a simple rule about guys (and I can say this because I’m a guy)… we don’t read directions. So and I’ll talk about some directions or instructions when I get a little bit further. My sainted father-in-law once said, if we to read instructions, we lost the war. Anyway. So what did I do? I went ahead and I went out to the marketplace, healthcare marketplace.gov, whatever it’s called. And I looked up what is the second lowest cost silver plan for a 22 year old single female living in the zip code she lives in. So when I got that number, then I went I took that percentage of the total premium and I allocated it to her. Okay, that resulted in -believe it or not based on her income – she ended up owing about $800 back. I thought well, okay, that’s what you deal with. That’s the risk, so no big deal. When I did the 2019 return, I did exactly the same thing. I said, Oh yeah, I gotta do this allocation thing again, which seemed to make sense to me, and was in fact reasonable. When the tax season started, our office hired a couple of experienced tax professionals who in fact, have worked with a lot of premium assistance situations. And one of them said to me, “Tom, why aren’t you allocating all the premiums on the marketplace to the parents? They have this huge net operating loss, they end up owing nothing; in fact, they end up getting money back, instead of allocating it portion of it to the daughter.” And I said, Well, I thought I had to. And I said, I went ahead and I went out, like I just told you, I went out to healthcare.gov. And I looked at a single female, this age, the zip code, and I allocated that percentage. They said, “you know, that’s an okay allocation but you don’t have to do that.” Let me go ahead to the next slide.
What I have for you here is I want you to look at the instructions, even the guys out there, look at the instructions to Form 8962. And I in fact, am giving you the link to it. So you go out and take a look at the instructions and I’m going to go to the next slide. In particular, I want you to go to allocation situation 4: other situations where a policy is shared between two tax families. It’s on page 18 of the instructions. Look at this paragraph that I copied for you. Under the rules of this section, you and the other taxpayer may agree on any allocation of the policy amounts between the two of you. And I’m thinking wow, there it is… exactly what our new staff member said. We can go ahead – if they agree – allocate it any way that seems reasonable, as long as it ends up being 100% allocation between them. Now, I also copied out the next paragraph, which basically says if you can’t agree, then you know what you got to do, you got to allocate it by how many people are covered on the policy. So in this case, we’ve got Mom, dad daughter, we’re going to have to go thirds. Now somebody is going to have to have 34%. And then we’ll have 33%/33%. But that’s if they can’t agree. If they can agree, then the allocation can be as anyone sees fit. So this still doesn’t sit well with me. And you might remember that I’m a forms guy. So with that in mind, let’s go on to the next slide. Okay, I’ve gone ahead and given you a copy of page two of the Form 8962. And let me see if I can go ahead and play John Madden. And this is where it starts to make sense for me. On the one hand, where we talk about allocation, they asked for the social security number of the other taxpayer. And is there an allocation start month and stop month, and you can see in the instructions, it will tell you that you can actually vary throughout the course of the year. The premium percentage, the second lowest cost, silver plan percentage, and the allocation of any premium assistance. This is where it makes sense to me. So we would have this part of the 8962 on mom and dad, we would have this part of the 8962 on daughter. I’m thinking, and IRS says, as long as we’ve got the form and add in an adds up to 100%, we’re all good. This is exactly what our staff members were talking about. It doesn’t make sense to me really, from a standpoint of it being reasonable. But you know, we’re really not here to talk about what we think of the law, we’re here to apply the law. So a couple of thoughts I want to throw out to you on this. Again, making sure that they can agree. First of all, Mom and Dad, in this situation, they have a very large NOL. They’re going to end up with zero taxable income. And you might say, well, they shouldn’t be on the marketplace to begin with. They should have Medicaid. I agree with you. However, they don’t want to be on Medicaid. So every year when they sign up for marketplace insurance, they say that they think they’re going to earn between $40-$50,000. So then when we go ahead and file their tax return, they end up getting a refundable premium assistance credit, because they overstated their income. I’m not going to make any judgment call about that. And I don’t think there’s anything illegal. The second thing you might be wondering is now that I’ve learned these facts, am I thinking about going back and amending the returns for the family for 2018 to 2019? And I’ll tell you I don’t think I am, and I’ll explain to you why. When amended returns are submitted, and we’re still in that environment where I know 2019 returns are able to be done electronically. But 2018, we’re going to have a human being looking at it. And I’ve got to believe that somebody at the IRS is going to say, you can’t do this. You can’t allocate all of those premiums to one party and nothing to the others. And then I’m going to have to explain or go to appeals or go to Taxpayer Advocate to explain, yeah, you can go ahead and do that. It’s strange, but at the same time, it’s what the instructions tell us. And I know instructions are not substantial authority, but it certainly would be a place to start.
Now, let me give you a converse example, to what the ladies we hired described, where it went the other way. Mom has insurance on herself, and also her two adult children. Again, not members of her household, her children, but under the age of 26. So they can be on her policy. And when preparing her return said, “boy, it looks like you’re going to owe thousands of dollars in premium assistance back. We need to do an allocation to your children. They’ll end up owing hundreds, but you won’t owe thuosands.” So as you might expect, the children weren’t so happy about having to pay any taxes. I’m not even going to go there when you’re dealing with children. So the mother says, as my mom used to say when she was living in order to keep peace, she instructed the preparer put it all on me. So let’s think again about what this form would do. So on the allocation -now we’ve got the 1095A – shows the three people. We’re going to allocate between households and the IRS is looking for what? 100%. So we’re going to go ahead and allocate 100% to mom, 0% to child one, 0% to child two, and they’re happy. Mom ends up owing thousands of dollars. But she says, “you know what, that’s just going to be less of an inheritance they’re going to get down the road.” So this to me makes sense of why it would work because what the IRS is going to look at is that the allocation add up to 100%. I don’t think there’s anything immoral or unethical about it if we are following the rules. And in this case, I’ve given you the publication to follow. I’ve also given you the form. And by the way, the ladies have also mentioned that when they have done this in the past, they are not aware of any IRS scrutiny coming back and saying no, no, you can’t do this. There’s got to be some allocation, which is what I thought, some allocation of at least a portion of those premiums to every individual covered. And again, I just showed you in the instructions is not the case.
You know, like I said, when we began this section, I learn something new every day. I see a lot of questions that come up there on our Facebook group, which asked you know, is it is it proper, for example, to always have taxpayers filing jointly and this year file separately because they may benefit from stimulus payments, etc. You know, and that is perfectly acceptable. We are allowed to advise our clients to legally pay the least amount of tax the law allows. And this is certainly an example of such a situation. I hope the tax season is going smoothly for you. We’re going to be doing more of these blogs on a video basis so you can listen. Maybe you’re making coffee and walking around your office in the wee hours of the morning as you’re getting ready to face the day. But nonetheless, for now, this is Tom O’Saben from the University of Illinois Tax School Southern Command Center in snowy Maryville, Illinois, hoping you stay warm, and we’ll say goodbye for just a while. Good luck with some more of the filing season.
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