IRS Explains the Reinstated Sec. 35 Health Coverage Tax Credit

The IRS issued Notice 2016-2 to explain how the recently reinstated Sec. 35 health coverage tax credit (HCTC) applies for 2014 and 2015. The tax credit had expired at the end of 2013, but the Trade Preferences Extension Act of 2015, P.L. 114-27, enacted June 29, 2015, retroactively reinstated it from 2014 through 2019. As enacted, the HCTC can be claimed for health insurance purchased through a health insurance exchange, but only for 2014 and 2015.

Sec. 35(a) grants a 72.5% credit of the amount paid for qualified health coverage for an eligible taxpayer and qualifying family members for the eligible coverage month. Eligible taxpayers are:

1. Eligible trade adjustment assistance (TAA) recipients (taxpayers who are eligible for TAA under a Labor Department Employment and Training Administration program of the U.S. Department of Labor);
2. Eligible alternative TAA (ATAA) recipients and reemployment TAA (RTAA) recipients; and
3. Eligible Pension Benefit Guaranty Corp. (PBGC) pension recipients (taxpayers who are at least 55 and who are receiving a pension, any portion of which the PBGC pays).

The new law adds health insurance obtained on an exchange to the list of qualified health coverage under Sec. 35.

To claim the HCTC, a taxpayer makes an irrevocable election each year that will apply for all coverage months that the taxpayer is eligible for the credit. A taxpayer can make the election on an original or amended return.

For 2014, the year for which the HCTC was reinstated retroactively, the HCTC can be claimed only on an amended return. The notice states that a taxpayer who has not yet filed his or her 2014 return must file an original return not claiming the credit and then an amended return. For 2015, the HCTC can be claimed on an original return.

Taxpayers who are eligible for both the Sec. 36B premium tax credit and the HCTC may choose between the two, but once the HCTC has been elected, taxpayers cannot change the election unless they no longer qualify for the HCTC.

Taxpayers may claim both credits in the same coverage month for different coverage; for example, the taxpayer claims the HCTC for self-only coverage, and family members claim the Sec. 36B credit for other coverage in the marketplace. Taxpayers who claim both credits during the tax year and who received advance payments of the Sec. 36B credit should be aware that the limitation on the required repayment of excess credit payments under Sec. 36B(f)(2) will not apply to them.

The notice contains several Q&As illustrating how the HCTC and the Sec. 36B credits apply.