What should an assister tell a consumer who is married but won’t file taxes with his or her spouse? An assister should give the consumer all the information
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Authors Tara Straw and January Angeles Acknowledg ements The Center on Budget and Policy Priorities is grateful to The California Endowment and T he Annie E. Casey Foundation for funding the development of this guide . The authors are also grateful for the valuable contributions of our colleagues Jeannie Biniek, Judy Solomon, Michele Vaughn, Rob Cady , January Angeles , Halley Cloud and Inna Rubin who helped review, edit and design this guide. Updated October 2019
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Table of Contents Introduction . 4 Tax-Related Elements of the Marketplace Application 5 Who is a Tax Filer? .. 5 Who Must F ile Taxes? 6 Who Can Be in a Tax Household? 8 Single 9 Married Filing Jointly .. 9 Married Filing Separately 11 Head of Household . 11 Qualifying Widow(er) With Dependent Child(ren) . 13 Who Can Be Claimed as a Dependent on a Tax Return? 15 Rules for All Dependents 15 Rules for Claiming a Qualifying Child . 15 Rules for Claiming a Qualifying Relative . 17 The Difficulty of Projecting Tax Dependency 18 How Does Medicaid Determine Households ? .. 20 Medicaid Household Rules for Tax Filers 20 Special Rules .. 21 State Options .. 21 How do Premium Tax Credit and Medicaid Household Rules Compare? 26 What Income Counts for Medicaid and Premium Tax Credit Eligibility? 28 What Is Gross Income? 30 What Adjustments (Deductions) Can Be Made From Gross Income? .. 32 When Should a Tax Dependent™s Income Be Counted? . 33
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4 Introduction The health reform law ushered in revised Medicaid eligibility rules that align with the new rules for the premium tax credit , which is used to defray the premium cost of hea lth insurance purchased in the m arketplace. Both programs use definitions of income and household that are based on the Internal Revenue Code. The use of tax rules to define what is counted as income and who is in a household is a significant change for people who are f amiliar with the previous Medicaid rules . Unlike the standard application of tax rules, which are applied based on actual income and household composition for the previous tax year, applicants for the premium tax credit must apply these rules prospectively to estimate their income and household size in the coming year . This projection is unique to the administration of the premium tax credit . Complications can arise with both the initial estimate of household members and income and with mid -yea r changes that m ay affect eligibility. Household rules define whose income to count in determining eligibility and how many people are in a person™s family for the purpose of Medicaid and premium tax credit eligibility . The premium tax credit follow s tax rules in determining households; a premium tax credit household is the same as the tax unit. Medicaid, on the other hand, uses a person™s status as a tax filer, tax dependent, or non -filer to determine who is in an individual™s household and whose income is counted when making an eligibility decision. Both Medicaid and the premium tax credit determine eligibility based on income in relation to the federal poverty line, which is dependent on household size. Income rules determine which types of income are considered in eligibility determinations and which income can be excluded. Medicaid consider s current monthly income, while the premium tax credit is determined based on projected annual income. For Medicaid, one only needs to know whether a per son™s income is above or below the threshold for eligibility. The premium tax credit , on the other hand, is based on a sliding income scale which means the amount of the credit is sensitive to changes in income. Even small increases in projected income will lead to a reduction of the premium tax credit; if the income changes are unreported, a consumer may need to pay back all or part of their tax credit when filing their tax return the following year . Income decreases can make a consumer eligible for a larger premium tax credit and reduce their monthly premium payment , or income decreases can make the consumer eligible for Medicaid . This guide is designed to familiarize people who are assisting consumers with the health care affordability program application with the tax rules that are applied in determining eligibility for these programs . A basic understanding of these rules can help guide discussions with applicants, especially those with complicated family situations or multiple sources of inco me, or who are unf amiliar with filing taxes. This is not a comprehensive tax guide, a substitute for seeking tax advice, or sufficient training to enable assisters to provide tax advice.
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5 Tax -Related Elements of the Marketplace Application State -Based Marketplace s and the Federally -Facilitated Marketplace use application s that gather information to determine eligibility for Medicaid , the Children™s Health Insurance Program (CHIP), and the premium tax credit . The information includes: Whether the ap plicant files taxes : People who receive a premium tax credit must agree to file taxes for the year they receive advance payments of the credit to help pay their premiums . Filing taxes is not an eligibility factor for Medicaid , but whether an applicant files taxes makes a difference in determining who is in an applicant™s household. Who is in the applicant™s household: The size of an applicant™s household will determine the family™s income compared to the federal poverty line and their options for health insurance coverage . Determining who is in a household requires knowledge of the filing status a person will use on her tax return and understanding how to determine the number of dependents she can claim . What is the applicant™s household income: Eligibility is based on modified adjusted gross income (MAGI) , which is adjusted gross income plus excluded foreign income, tax -exempt interest, and non -taxable Social Security benefits . A household™s total income is the MAGI of everyone in the household with a tax filing requirement, including any dependents who are required to file taxes. Who is a Tax Filer? The Federal ly-Facilitated Marketplace application begins with this question: Does [applicant] plan to file a federal income tax return for [the calendar year in which coverage is being sought ]? This question is important for two reasons. First, the answer triggers other questions in the dynamic application that will determine wheth er the applicant is a tax filer, tax dependent , or neither for purposes of composing the applicant™s Medicaid household. Second, answering that the applicant will not file taxes bars them from consideration for the premium tax credit , since credit recipients are required to reconcile the premium tax credit on the tax return. When asked whether he or she plans to file taxes, an applicant should answer YES if he or she: Expects to have a tax filing requirement and will file ; Does not expect to have a tax filing requirement but will file anyway, for any reason (such as, to get a refund of federal income tax withheld or to claim the earned income tax credit) ; or Does not have a tax filing requirement or is unsure about whether tax filing will b e required but would file in order to qualify for a premium tax credit . People who indicate that they will not file taxes will continue the application process to assess their eligibility for Medicaid or CHIP and to purchase private insurance i n the market place at full cost, but they will not be considered for the premium tax credit.
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6 Who Must File Taxes? The IRS requires certain people to file taxes. Table 1 indicates who needs to file a tax return based on filing status, age, and income for the tax year. In some cases, a person who will be claimed as a dependent must file taxes. The factors that determine whether a dependent must file a return include the amount of the dependent™s earned and unearned income, and whether the dependent is married, age 65 or older, or blind. Table 2 shows when dependents need to file a return based on these factors. Note that the 2017 tax law increased the amount of earned income a dependent can make before triggering a tax filing requirement, which means far fewer depe ndents will need to file. Some peopl e must file a return even if their income is below the filing threshold. People who have at least $400 in net earnings from self -employment or who earn tips are some of th ose required to file. For a complete list, see IRS Publication 17 . Table 1: 2019 Federal Tax Filing Requirements IF filing status is AND age at the end of 201 9 was* THEN required to file a return if gross income was at least** Single under 65 $12,200 65 or older $13,850 Head of Household under 65 $18,350 65 or older $20,000 Married, Filing Jointly*** under 65 (both spouses) $24,400 65 or older (one spouse) $25,700 65 or older (both spouses) $27,000 Married, Filing Separately any age $5 Qualifying Widow(er) with Dependent Child(ren) under 65 $24,400 65 or older $25,700 * Individ uals born before January 1, 195 5 are considered to b e 65 or older at the end of 201 9. Individuals who are blind have a higher filing threshold. Consult Publication 17. ** Gross income means all income you received in the form of money, goods, property, and services that isn™t exempt from tax, including any income from sources outside the Un ited States. It also includes gain from the sale of your main home, even if you can exclude part or all of it. Include only the taxable part of social security benefits. Also include gain s, but not losses, reported on Form 8949 or Schedule D. Gross income from a business means, for example, the amount on Schedule C, line 7, or Schedule F, line 9. But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C, line 7, or Schedule F, line 9. *** If the person did not live wi th the spouse at the end of 201 9 (or on the date the spouse died) and your gross income was at least $ 5, you must file a return regardless of your age.
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8 Who Can Be in a Tax Household ? Determinations of eligibility for Medicaid and the premium tax credit are ba sed on the number of people in the applicant™s household and the income of household members. For the premium tax credit , the household is defined using tax rules th at determine filing status and dependency . This means that people who file their taxes as a single household will always be considered as a single household for the purpose of determining their eligibility for the premium tax credit and the amount of the c redits they will receive . Medicaid uses tax filing information to determine who is in a household, but uses different rules that sometimes result in a different outcome than for the premium tax credit (for a lengthier discussion of the Medicaid household r ules, see the fiHow Does Medicaid Determine Households?fl section ). The tax household is determined based on marital status, relationship , age, residency, and support in paying for living expenses. When people complet e their tax returns, these factors are considered based on the calendar year that just ended. However, in the health care context, these factors must be applied prospectively to determine who is in a person™s household. Marital status determine s which ta x filing status an individual can use. Understanding tax filing status is important when applying for coverage because people who are married cannot receive the premium tax credit if they file their taxes using the status of Married Filing S eparately. There are five filing status options, which are illustrated in Figure 1, and discussed in more d etail in the following sections. Figure 1: Tax Filing Status Options and Requirements
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9 Single A person is Single if on the last day of the tax year he or she is unmarried, legally separated or divorced , as defined by state law . Some considerations for people who are filing as Single include the following: Living apart: Married people cannot claim to be Single if they are still married, even if the y have been living apart from their spouse for a long time or their spouse is in another country. Legal separation: Some states do not recognize legal separation (or decree of separate maintenance) , meaning th at separated spouses must file as married (either jointly or separately) until their divorce is finalized. Divorce: A divorce decree must be final in order for the tax filer to be considered Single . An interlocutory decree Š a temporary court judgment Š is not final and does not qualify a person to be Single. Married Filing Jointly A couple can file as Married Filing Jointly if they are l egally married in their state, whether they live together or apart . Joint filing means joint responsibility for any tax, interest , or penalty due on the return. This includes joint responsibility for the premium tax credit, even if only one spouse qualifies for the credit. For example, if one spouse receives more advance premium tax credit than th ey were eligible to receive, both spouses are liable for any resulting repayment of the credit. Some considerations for people who are Married Filing Jointly include the following: Common law marriage: Common law marriage Š a marriage established when a c ouple presents themselves as married but does not have a marriage license Š is recognized by only about one -quarter of states . In some cases, it is only recognized for certain purposes or is only valid if established before a specific date. (At least four states have enacted laws to end recognition of common law marriage and will only recognize marriages established prior to the change in law.) Assisters should consult state law to find out whether common law marriage is recognized in their state and, if so, how someone qualifies. In a state that recognizes common law marriage, a couple is considered married for federal tax purposes and should acknowledge their marriage in the health care application. Once established, t heir fimarriedfl status continues to b e valid, even if they move to a stat e that does not recognize common law marriage. (Note that once a common law marriage is established, a couple that wishes to end their relationship and be considered no longer married must usually file for divorce.) In a state that does not recognize common law marriage, a couple canno t be considered married without a marriage license, no matter how long they have lived together. ASSISTERS TIP What should an assister tell a consumer whose marital status will change during the year? Under IRS rules, a person™s marital status for the entire year is determined by whether he is single, married, legally separated, or divorced on the last day of the calendar year for which the person is filing a tax return. While the IRS determines tax filing status as of the last day of the year, CMS has said that applicants for the premium tax credit and Medicaid should provide their current filing status on their a pplication. For example, a person who anticipates being divorced by the end of the year would be considered married when applying for coverage, but should update his marital status with the marketplace when the divorce is finalized.
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10 Same -sex marriage: A same -sex couple is considered married for federal tax purposes . Registered domestic partners are not considered married under state law, and therefore aren™t married for federal tax purposes. Widow/widower: If a spouse dies during the tax year, the surviving spouse is considered to be married for the entire tax year a nd can file jointly or separately from their deceased spouse. Note that if the surviving spouse files as Married Filing Separately, he or she will not be eligible for premium tax credits. Nonresidents: In general, a couple cannot file jointly if one spouse is a nonresident for any portion of the year. However, they can choose to file jointly if one spouse is a U.S. citizen or resident and the nonresident spouse agrees to be treated as a U.S. resident for t he year; in that case, both spouses would be taxed o n worldwide income. Note that the IRS generally refers to non -citizens as firesident aliens fl or finonresident aliens, fl rather than using terms more common in immigration or public benefits, like lawful permanent resident or filawfully present .fl (Another term used by the IRS , U.S. national, refers to people who are not citizens but owe their allegiance to the United States; these include American Samoans and Northern Mariana Islanders.) For more on the tax treatment of U.S. residents and nonresidents , see IRS Publication 519. In general, a person is a U.S resident if he or she is a green card holder or meets the substantial presence test , which is based on the length of time an individual is present in the United States. Anyone who does not qualify as a resident (and is not a citizen or a U.S. national) is a nonresident. Nonresidents have different tax obligations. (The tests used by the IRS in determining whether someone is a nonresident are different than the tes ts used in determining whether an individual™s immigration status qualifies him or her for Medicaid or the premium tax credit .) ASSISTERS TIP What should an assister tell a consumer who is married but won™t file taxes with his or her spouse? An assister should give the consumer all the information needed to make an accurate prediction of his or her tax filing status and the consequences of mistakenly claiming to be eligible for the premium tax credit . First, remember that tax filing is not a factor in determining Medicaid eligibility and people filing as Married Filing Separately can still qualify for Medicaid. Second, make the consumer aware that except for circumstances involving domestic abuse or spousal abandonment, filing taxes as Married Filing Separately disqualifies him from the premium tax credit . Knowing this, the consumer and his spouse may choose to file jointly. Also, remember that people may have tax reasons for filing separately from a spouse Š receipt of a premium tax credit may not be the only consideration. Third, discuss with the client whether they can qualify as Head of Household. Walk through each step of the test to determine if the person will live separately from his spouse in the last six months of the tax year, will p ay more than half the cost of keeping up the home, and will claim his child as a dependent. Finally, inform the consumer that he should update his account information if his expected filing status changes. If a married person is denied the premium tax cre dit because they won™t file taxes with their spouse but then divorces, he may be newly eligible for the premium tax credit for the year. (However, divorce alone does not qualify a person for a Special Enrollment Period; the consumer must already be enrolle d in a qualified health plan or will need another qualifying event , such as loss of the spouse™s insurance, to enroll in marketplace coverage.)
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11 Married Filing Separately Some married people do not file a tax return jointly with their spouse. This might happen because one spouse is not available to sign the return, the couple is separated and unwilling to file taxes jointly, or the couple is together but they don™t want to be held jointly liable for each other™s taxes. Married people who file separately face several disadv antages: a higher tax rate than couples filing jointly, fewer income deductions are available to them and deductions are phased out at a lower income level, and certain tax credits Š including the premium tax credit Š are not allowed . A person who files taxes as M arried Filing Separately cannot claim a premium tax credit, regardless of their reason for filing separately. There are two exception s. The exceptions can be claimed for no more than three consecutive years. Survivors of domestic violence : A taxpayer who live s apart from his or her spouse and is unable or unwilling to file a joint tax return due to domestic violence will be deemed to satisfy the joint filing requirement by making an attestation on his or her tax return. Under this IRS rule , taxpayers may qualify for the premium tax credit despite filing separately . Domestic abuse is defined as fiphysical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim™s ability to reason independently. fl The effects of drug or alcohol abuse by the victim™s spouse may be considered. Depending on a family™s particular circumstances, the abuse of the victim™s child or another family member living in the home may constitute abuse of the victim. Abandoned spouses: A taxpayer is still eligible for the premium tax credit if he or she has been abandoned by a spouse and certifies on the tax return that they are unable to locate the spouse after fireasonable diligence.fl Head of Household A person who is married but does not plan to file jointly with a s pouse can sometimes qualify as Head of H ousehold, a filing status that allows a person to be eligible for the premium tax credit , rather than Married Filing S eparately, which does not . In general, a person can be Head of Household if he or she is unmarried or considered unmarried for tax purposes and pays more than half of the costs of keeping up the home for a qualifying person who m he or she will claim as a dependent. The definition of fiqualifying personfl var ies based on whether the tax filer is actually single or is married but considered unmarried for tax purposes . For purposes of the health care application, it™s not necessary to decide whether a single person is eligibl e to file as Head of Household since both of the available filing options Š Single and Head of Household Š are qualifying statuses for the premium tax credit . For this reason , the test for Head of Household as a single person , which uses a broader d efinition of fiqualifying person,fl is not discussed here. But for someone who is married and not filing a joint return, the ability to file as Head of Household rather than Married Filing Separately is important because it makes the person eligible for the premium tax credit . A married person qualifies as Head of Household if he or she is considered unmarried . This means that the taxpayer is married but will live apart from their spouse in the last six months of the tax year . The person must pay more than half the cost of keeping up the home, and that home must be the main residence of a child, stepchild, or foster child who will be claimed as a dependent (with one
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