ACA households, dependents, exemptions and confusion

One of the confusing aspects of the Affordable Care Act is the interchangeable tax terms people use when defining a household. The federal and state exchanges use the terms children or dependents when describing members of a household. The IRS uses the more accurate, but confusing terminology, of personal exemptions as the true test for who is actually part of the ACA household.

ACA household dependents, deductions and exemptions

My research into the obscure semantics of ACA terminology was prompted by a comment on one of my blog posts about the definition of a family. In this particular case, there were six people living in the household: two married adults and four step children. Apparently, the primary tax filer, or step father, claimed a personal exemption for all four children on his taxes, but only claimed two of the children as dependents. The divorced biological father, who is a noncustodial parent, claimed his children as dependents on his federal taxes. The question was if the blended family household was a total of six or four when applying for an ACA health plan with tax credits?

—The following is not tax advice. Consult with your tax preparer and IRS specific form instructions for the nitty gritty details.—

Children are personal exemptions

For the purposes of the ACA Advance Premium Tax Credit, the household is made up of personal exemptions from the primary tax filers federal tax return. In general, a dependent is a child or other relative who receives over half his or her living support from the primary tax filer- Head of Household, Single or Married Filing Joint. If the person is a qualified dependent under IRS regulations, the primary tax filer can claim a personal exemption on his or her taxes. If a family made less than $150,000 in 2013, each personal exemption was worth $3,900 deduction to the household taxable income. The tax filer’s spouse, when filing jointly, receives the personal exemption on the taxes as well.

Qualified dependents trigger a personal exemption deduction

All of these exemptions and dependents result in a deduction, which is another term used to define household members. But it is the little used IRS term personal exemption that is the true measuring stick for household members. If people aren’t familiar with the term personal exemption, it may cause some confusion when filing out Form 8962 to reconcile tax credits and the final Modified Adjusted Gross Income for 2014 federal taxes. Many of the documents referenced below can be downloaded at the end of the post.

Then what’s a health coverage exemption?

Additionally, the personal exemptions should not to be confused with Form 8965 for the Health Coverage Exemption. The health coverage exemption is granted to individuals or families exempting them from having health insurance and thus not subject to the shared responsibility or individual mandate penalty.

IRS Final Rules

The foundation and reference for the personal exemption as that definition for a dependent household member can be found in several publications. First is the IRS final rules on the ACA-

(d) Family and family size. A taxpayer’s family means the individuals for whom a taxpayer properly claims a deduction for a personal exemption under section 151 for the taxable year.

Next are the draft Form 8962 and instructions that will be used to reconcile Advance Premium Tax Credits based on the tax year’s Modified Adjusted Gross Income

Form 8962

The first question from the draft version of Form 8962-

1. Family Size: Enter the number of exemptions from Form 1040 or Form 1040A, line 6d or 1040NR, line 7d.

Draft 8962 Instructions

Tax family. For purposes of the PTC, your tax family consists of the individuals for whom you claim a personal exemption on your tax return (you, your spouse with whom you are filing a joint return, and your dependents). Your personal exemptions are reported on your Form 1040 or Form 1040A, line 6d, or Form 1040NR, line 7d. Your family size equals the number of individuals in your tax family.

Finally, we have the IRS sieve for determining who meets the definition of a dependent.

From 1040 instruction for 2013

Do You Have a Qualifying Child?

A qualifying child is a child who is your…

Son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew)

AND was …

Under age 19 at the end of 2013 and younger than you (or your spouse, if filing jointly)

or

Under age 24 at the end of 2013, a student (defined later), and younger than you (or your spouse, if filing jointly)

or

Any age and permanently and totally disabled (defined later)

AND

Who did not provide over half of his or her own support for 2013 (see Pub. 501)

AND

Who is not filing a joint return for 2013 or is filing a joint return for 2013 only to claim a refund of withheld income tax or estimated tax paid (see Pub. 501 for details and examples)

AND

Who lived with you for more than half of 2013. If the child did not live with you for the required time, see Exception to time lived with you, later.

Additional conditions are that the child-

• Is U.S. citizen, U.S. National, U.S. resident alien or resident of Canada or Mexico.
• Is not married, although there are certain conditions where a married child can be claimed as a dependent.
• Neither tax filer or spouse are claimed as dependents on someone else’s tax return.

What about my mom who lives with us?

Is Your Qualifying Relative Your Dependent?

A qualifying relative is a person who is your…

Son, daughter, stepchild, foster child, or a descendant of any of them (for example, your grandchild)

or

Brother, sister, half brother, half sister, or a son or daughter of any of them (for example, your niece or nephew)

or

Father, mother, or an ancestor or sibling of either of them (for example, your grandmother, grandfather, aunt, or uncle)

or

Stepbrother, stepsister, stepfather, stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

or

Any other person (other than your spouse) who lived with you all year as a member of your household if your relationship did not violate local law. If the person did not live with you for the required time, see Exception to time lived with you, later

AND

Who was not a qualifying child (see Step 1) of any taxpayer for 2013. For this purpose, a person is not a taxpayer if he or she is not required to file a U.S. income tax return and either does not file such a return or files only to get a refund of withheld income tax or estimated tax paid. See Pub. 501 for details and examples

AND

Who had gross income of less than $3,900 in 2013. If the person was permanently and totally disabled, see Exception to gross income test, later

AND

For whom you provided over half of his or her support in 2013. But see Children of divorced or separated parents, Multiple support agreements, and Kidnapped child, later.

Additional conditions are that the dependent is-

• A U.S. citizen, U.S. National, U.S. resident alien or resident of Canada or Mexico.
• Not be married, although there are certain conditions where a married dependent can be claimed as a dependent.
• Neither the tax filer or spouse can be claimed ad dependents on another person’s tax return.

Noncustodial parent

The issue of whether a noncustodial parent, or the parent with whom the child spent less than six months of the year living with, can claim the child as dependent and receive the personal exemption on his or her taxes can be complicated. Again from the 2013 Form 1040 instructions.

Children of divorced or separated parents. A child will be treated as the qualifying child or qualifying relative of his or her noncustodial parent (defined later) if all of the following conditions apply.

1. The parents are divorced, legally separated, separated under a written separation agreement, or lived apart at all times during the last 6 months of 2013 (whether or not they are or were married).
2. The child received over half of his or her support for 2013 from the parents (and the rules on Multiple support agreements, later, do not apply). Support of a child received from a parent’s spouse is treated as provided by the parent.
3. The child is in custody of one or both of the parents for more than half of 2013.
4. Either of the following applies.

a. The custodial parent signs Form 8332 or a substantially similar statement that he or she will not claim the child as a dependent for 2013, and the noncustodial parent includes a copy of the form or statement with his or her return. If the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent may be able to include certain pages from the decree or agreement instead of Form 8332. See Post-1984 and pre-2009 decree or agreement and Post-2008 decree or agreement.

b. A pre-1985 decree of divorce or separate maintenance or written separation agreement between the parents provides that the noncustodial parent can claim the child as a dependent, and the noncustodial parent provides at least $600 for support of the child during 2013.

If conditions (1) through (4) apply, only the noncustodial parent can claim the child for purposes of the dependency exemption (line 6c) and the child tax credits (lines 51 and 65). However, this special rule does not apply to head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, the earned income credit, or the health coverage tax credit. See Pub. 501 for details.

Custodial and noncustodial parents. The custodial parent is the parent with whom the child lived for the greater number of nights in 2013. The noncustodial parent is the other parent. If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income. See Pub. 501 for an exception for a parent who works at night, rules for a child who is emancipated under state law, and other details.

Post-1984 and pre-2009 decree or agreement. The decree or agreement must state all three of the following.

1. The noncustodial parent can claim the child as a dependent without regard to any condition, such as payment of support.
2. The other parent will not claim the child as a dependent.
3. The years for which the claim is released. The noncustodial parent must include all of the following pages from the decree or agreement.

• Cover page (include the other parent’s SSN on that page).
• The pages that include all the information identified in (1) through (3) above.
• Signature page with the other parent’s signature and date of agreement.

It’s complicated!

The definition of household members as personal exemptions seems pretty straight forward until you run into a real life family. That’s why it is always good to get advice from a tax professional. I hate to say it, but Certified Insurance Agents, Certified Enrollment Counselors, Navigators and even the customer service staff at the state and federal exchanges have not been properly trained in all the different nuances of IRS regulations regarding qualifying dependents and personal exemptions. Hopefully this reference material will shine a little light on the tax semantics of the IRS and the ACA.

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