The Navigator’s Guide to Tax Rules

The Navigator’s Guide to Tax Rules

Determining Eligibility based on Income • Marketplace • Premium tax credits follow tax rules in determining households • A premium tax credit household is the same as the tax unit • Considers projected annual income • Indiana health coverage programs • Uses a person’s status as a tax filer, tax dependent, or non-filer to determine who is in the individual’s household and whose income is counted • Considers current monthly income

Tax-Related Elements of the Marketplace Application The Marketplace application gathers the following information: Whether the applicant files taxes: People receiving the premium tax credit (PTC) must agree to file taxes for the year after they receive advanced payments. What the applicant’s household income is: A household’s total income is the MAGI of everyone in the household with a tax filing requirement, including any dependents required to file. Who is in the applicant’s household: Determining who is in a household requires knowledge of the filing status used on the applicant’s tax return and how many dependents can be claimed.

Who is a Tax Filer? • The Marketplace application begins with this question: • Answering “no” to this question blocks the applicant from receiving the premium tax credit • These applicants can continue their application to assess their eligibility for Medicaid or CHIP or purchasing private insurance in the Marketplace at full cost Does [applicant] plan to file a federal income tax return for 2014?

Who Must File Taxes?

Who Must File Taxes? • Individuals born before January 2, 1950 are considered to be 65 or older the end of 2014. • Gross income means all income received in the form of money, goods, property and services that is NOT exempt from tax • Earned Income + Unearned Income • Includes gains but not losses • Does not include Social Security benefits unless: • The person is married filing a separate return and lived with the spouse at any time during 2014 OR • One-half of the person’s Social Security benefits plus other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly)

Who Must File Taxes?

Earned or Unearned Income? • Unearned Income • Taxable interest • Ordinary dividends • Capital gain distributions • Unemployment compensation • Taxable SS benefits • Pensions • Annuities • Cancellation of debt • Distributions of unearned income from a trust • Earned Income • Salaries • Wages • Tips • Professional Fees • Taxable scholarship and fellowship grants

Who Can Be in a Tax Household? • Tax households are determined based on marital status, relationship, age, residency and support in paying for living expenses 1. Single Unmarried, or legally separated or divorced 2. Married Filing Jointly Legally married, living together or apart 3. Married Filing Separately Legally married, living together or apart Unmarried or considered unmarried for tax purposes; pays more than ½ of costs of keeping up home for a qualifying dependent 4. Head of Household Has a spouse that passed away in the previous two tax years with a qualifying child 5. Qualifying Widow(er) with Dependent Children

Filing Status: 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 include: • Living apart: Married people cannot claim to be Single if they are still married, even if they 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—separated spouses must file as married until their divorce is finalized • Divorce: A divorce decree must be final in order for the tax filer to be considered Single

Filing Status: Married Filing Jointly • A couple can file as Married Filing Jointly if they are legally married in their state, whether they live together or apart • There is joint responsibility for any tax, interest or penalty due on the return, including responsibility for the premium tax credits, even if only one spouse qualifies for the credits • Indiana does not recognize common law marriage for federal tax purposes.

Assister Tip What should an assister tell a consumer whose marital status will change during the year? • A person’s marital status is determined by whether he or she is single, married, legally separated or divorced on the last day of the calendar year for which the person is filing a tax return • Applicants for premium tax credits should provide their current filing status on their application • For example, Sanjay anticipates being divorced by the end of the year, but he should indicate “married” on his application. Once the divorce is finalized, he can report the change to the Marketplace.

Filing Status: Widow/Widower • If a spouse dies during the tax year, the surviving spouse is considered married for the entire tax year • Can file jointly or separately from their deceased spouse • Must file Married Jointly to receive eligibility for premium tax credits

Assister Tip What should an assister tell a consumer who is married but won’t file taxes with his or her spouse? • Remember that tax filing status is not a factor in Medicaid eligibility • Make the consumer aware that except for circumstances like domestic abuse or spousal abandonment, filing taxes as Married Filing Separately disqualifies him or her from PTC • Remember that people may have other tax reasons for their filing status, and PTC may not be their only consideration • Discuss with the client whether they can qualify as Head of Household • Encourage the consumer to update account information if his or her expected filing status changes

Filing Status: Non-resident Aliens • In general, a couple cannot file jointly if one spouse is a non-resident 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 non-resident spouse agrees to be treated as a U.S. resident for the year • Both spouses would be taxed on worldwide income • In general, a person is a resident alien if he or she is a green card holder or meets the substantial presence test

Filing Status: Married Filing Separately • This may occur 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 • Cannot claim the premium tax credit, but there are two exceptions: • Survivors of domestic violence • Abandoned spouses

Filing Status: Head of Household • Unmarried or considered unmarried for tax purpose and pays more than ½ the costs of keeping up the home (rent, mortgage, real estate tax, home insurance, utilities, repairs, and food) for a qualifying person whom he or she will claim as a dependent • Considered unmarried means that the taxpayer is married but lives apart from their spouse the last six months of the tax year • A person who is married but does not plan to file jointly with a spouse can sometimes qualify • Eligible for premium tax credits

Assister Tip When can a married person file as head of household? • A married person is considered unmarried and is eligible to file as Head of Household if he or she can answer YES to each of the following questions: Will you file taxes separate from your spouse in the year in which the PTC is received? Will you live separately from your spouse form July 1 to December 31 in that year? Will you pay more than half of the cost of keeping up your home in that year? Do you have a child, stepchild, or foster child (of any age) who lives with you more than half the year? Will either you or the child’s other parent claim the child as a dependent? Yes No Yes No Yes No Yes No Yes No

What is a Qualifying Person? • For a married person to be considered unmarried, his or her home must be the main home for his or her child, stepchild or foster child for more than half the year. • The child can be any age • For a single person to be Head of Household, a qualifying person can be: • Any related person who lives with the taxpayer and is a dependent • Parents who are dependents but don’t have to live with the tax payer

Filing Status: Qualifying Widow(er) with Dependent Child(ren) • A person whose spouse died in the two previous tax years and who has a child who meets the definition of a qualifying person is eligible for this status • For example, Levi’s wife died in 2013, he has not remarried, and he will claim his 12-year-old daughter Jaqueline as a dependent. • Levi may file as a Qualifying Widower in 2014 and 2015 • (In 2013, he would have filed as Married Filing Jointly) • He may be eligible for PTC • He should indicate a marital status of Single on his application

Test Your Understanding #1 QUESTION: Maria is married and has a son, Eduardo, who is 7 years old. Maria’s husband moves out in December 2014, but they do not expect to divorce in 2015. Maria is applying for health insurance during open enrollment for 2015. Since her husband left, Maria pays more than half the cost of keeping up the home. She does not have an offer of insurance through her job, and her income is too high for Hoosier Healthwise or the Healthy Indiana Plan. Does Maria’s projected filing status for 2015 allow her to qualify for premium tax credits?

Test Your Understanding #1 ANSWER: Maria may qualify for premium tax credits, depending on her filing status. She has a few options: • She could file jointly with her husband if they are still legally married by the end of 2015 and they mutually agree to file together • Maria also appears to qualify as Head of Household if her son, Eduardo, will live with her at least half the year, she (or her husband) will claim Eduardo as a dependent, she continues to pay more than half the cost of keeping up her home, and her husband is not living in the home during the last six months of the year • However, if she files as Married Filing Separately, remember that she will NOT be eligible for premium tax credits.

Who Can be Claimed as a Dependent on a Tax Return? • The Marketplace application asks for the number of dependents an applicant will claim for tax purposes • This question helps determine household size and whose income to include in MAGI for the family • There are three threshold tests that must be met to claim someone as a dependent

Who Can be Claimed as a Dependent on a Tax Return? Rules for ALL Dependents • The person claiming the dependent cannot be a dependent of another taxpayer • If the prospective dependent is married, he or she can still be claimed as a dependent. However, if the married dependent files a joint return with his or her spouse, the return must be filed only to claim a refund of taxes paid during the year through wage withholding • The prospective dependent must be a U.S. citizen, resident or national or must be a resident of Mexico or Canada

Rules for Claiming a Qualifying Child Rules for Claiming a Qualifying Child • Relationship—child must be: • Biological, adopted, foster, or stepchild of the taxpayer • Brother or sister (including half- and step-siblings of the taxpayer • Niece, nephew, or grandchild of the taxpayer • Age—at the end of the tax year, the child must be: • Under age 19 and younger than the taxpayer • Under age 24, if a full-time student for at least five months of the year and younger than the taxpayer • Any age if permanently and totally disabled

Rules for Claiming a Qualifying Child • Residence—child must live with the taxpayer for more than half the year • Temporary absences, such as a child who attends college and is living away from home, are considered time in the parents’ home • There are exemptions for children of divorced or separated parents or parents who live apart: • Parents may agree that the noncustodial parent will claim the child, even if the child lived with the custodial parent for the majority of the year • The custodial parent must agree and sign a tax form to allow the noncustodial parent to claim the child

Rules for Claiming a Qualifying Child • Support—child must not provide more than half of his or her own support • Total support includes rent or fair rental value of the home, food, utilities and home repairs, with costs equally divided between family members to decide the child’s portion. • Expenses related to the child’s clothing, education, medical, travel and other expenses are included • State benefits such as TANF or food support are not included • Includes all of the child’s taxable and nontaxable income such as wages, Social Security benefits, student loans, and other income • Only funds used for the child’s support are included

In general a child can be claimed as a Qualified Child if she… Is a U.S. citizen or resident of the U.S., Canada or Mexico Lives with the tax filer for more than half the year Is under 19 at the end of the year (or 24 if a full-time student or any age if disabled) A child can include the tax filer’s child, step child, adopted child, foster child, brother, sister, niece, nephew or grandchild Doesn’t provide more than half of her own support

Rules for Claiming a Qualifying Relative • Not a Qualifying Child • Relationship—prospective dependent must either be related to the taxpayer or live in the taxpayer’s home for the entire year • Income—The prospective dependent must not have gross income greater than $3,900 • Support—The taxpayer must pay more than half the support of the prospective dependent.

In general a person can be claimed as a Qualified Relative if he… Is a U.S. citizen or resident of the U.S., Canada or Mexico Receives more than 50% of his support from the tax filer Cannot be claimed as a Qualifying Child Is related to the tax filer or lives in the tax filer’s home all year Other individuals can include a relative, in-law or a full-time member of the tax filer’s household Makes less than $3,900 (in 2014). Generally doesn’t include Social Security

Test Your Understanding #2 QUESTION: Alani and her daughter, Kalea (age 4), live with Alani’s boyfriend, Sam, who is not Kalea’s father. Alani and Sam both work and file their taxes separately. Who can claim Kalea as a dependent?

Test Your Understanding #2 ANSWER: Only Alani can claim Kalea as a dependent. Kalea meets the test to be her Qualifying Child. (Kalea is not Sam’s Qualifying Child because she isn’t Sam’s child.) Because Kalea is Alani’s Qualifying Child, she cannot be Sam’s Qualifying Relative.

How Does Medicaid Determine Households? • Household and composition are determined separately for each member of the household • Based on the individual’s plan to file • There are three sets of household rules that Medicaid applies that depend on whether someone is: • A tax filer • A tax dependent • Neither a tax-filer nor a dependent

Medicaid Household Rules for Tax Filers • Tax filers claiming their own exemption and not being claimed as a dependent. The household is the tax filer, the spouse filing jointly, and everyone whom the tax filer claims as a tax dependent • Tax dependents. The household is the same as the household of the tax filer claiming the individual as a tax dependent. However, there are three exceptions to this rule, when the rule of non-filers is applied. These exceptions are: • Individuals expecting to be claimed as a dependent by someone other than a parent • Children (under 19) living with both parents, whose parents do not expect to file a joint tax return • Children (under 19) who expect to be claimed as a tax dependent by a non-custodial parent

Medicaid Household Rules for Tax Filers (cont.) • Individuals who neither file a tax return nor are claimed as a tax dependent. The household rules for people in this category differ based on whether the individual is an adult or child: • If the individual is an adult, the household includes the individual plus, if living with the individual, his or her spouse and children who are under 19 years old • If the individual is a child under 19 years old, the household includes the child and any siblings under 19 years old and parents who live with the child

Medicaid Household Rules for Tax Filers (cont.) Special Rules • Married couples who live together are always counted in each other’s household regardless of whether they file a joint or separate return • A pregnant woman is counted as herself plus the number of children she is expected to deliver 2

Test Your Understanding #3 QUESTION: Sandi and Jose are married and have a son, Gabriel. Sandi’s mother, Doris, lives with them. Sandi and Jose file jointly and claim Gabriel as their Qualifying Child. Doris files taxes on her own. What is the Medicaid household for each member of the family?

Test Your Understanding #3 ANSWER: Sandi and Jose are considered tax filers. Using the rule for tax filers, their household includes themselves and everyone else in their tax filing unit, so they can have a household of three. Gabriel is a tax dependent who is the child of the tax filer. Using the tax dependent rule, Gabriel’s household is the household of the tax filer claiming him, so he has a household of three. Doris is a tax filer, so her household includes just herself.

Comparing PTC and Medicaid Household Rules • Premium Tax Credit (PTC) households are determined by how people file taxes while Medicaid Households are determined by tax filing status, living arrangements, and relationships with members of household • Often, the households will be the same for both • The Marketplace will always determine Medicaid eligibility first, since eligibility for Medicaid will disqualify someone from PTC eligibility

Test Your Understanding #4 QUESTION: Alex and his wife, Lizzie, file taxes jointly. They live with and support Alex’s mom, Anita, whom they claim as a dependent on their tax return. What are the Medicaid and PTC households for each member of the family?

Test Your Understanding #4 ANSWER: Alex and Lizzie are tax filers, so their Medicaid household includes themselves and everyone else in their tax filing unit. Anita is a tax dependent, but she is not a child of the tax filer, so Medicaid will apply the non-filer rule. Anita’s household includes herself. For PTCs, Alex, Lizzie and Anita are in the same household.

Test Your Understanding #5 QUESTION: Franz and Helga live together and have a son, Theo. They are not married, so they can’t file a joint tax return. Helga files as Single. David files as Head of Household and claims Theo as a dependent. What are the Medicaid and PTC households for each member of the family?

Test Your Understanding #5 ANSWER: Helga’s Medicaid household includes only herself. Franz’s household includes himself and Theo. Theo is a tax dependent, but he falls under one of the exceptions because he lives with both his parents who do not file a joint return. Using the non-filer rule, Theo’s Medicaid household includes himself and both parents with whom he lives. For PTCs, Franz and Helga’s household remains the same. Theo's PTC household will be based on his filing unit, which includes himself and Franz.

What Income Counts? • Modified Adjusted Gross Income (MAGI) is the method used by all states and the federal government to measure income for most children and non-disabled, non-elderly adults in Medicaid and all recipients of PTC • A household’s MAGI is the sum of the MAGIs of each family member with a tax filing requirement • The applicant’s most recent tax return can be helpful in estimating income if their income has not changed

Formula for Calculating MAGI Non-Taxable Social Security Benefits Adjusted Gross Income Tax-Exempt Interest Excluded Foreign Income Interest income not subject to federal income tax Line 8b IRS Form 1040 AGI is gross income minus adjustments to income Line 37 IRS Form 1040 Social Security benefits not included in gross income Line 20a - 20b IRS Form 1040 Foreign earned income excluded from taxation of individuals who live abroad IRS Form 2555 Modified Adjusted Gross Income

When Should a Dependent’s Income Be Counted? • Only when the tax dependent is required to file a tax return (for both PTC and Medicaid) • In general, dependents claimed on someone else’s tax return must file taxes if they receive at least • $6,100 in earned income OR • $1,000 in unearned income • Supplemental Security Income (SSI) or Social Security benefits are not counted for the purposes of determining whether a dependent will be required to file taxes • However, if the dependent does have a tax filing requirement, then Social Security benefits will be counted toward the household’s MAGI

The Navigator’s Guide to Tax Rules