New Guidance Issued for Health Coverage Tax Credit

On December 23, 2015, the Internal Revenue Service issued Notice 2016-2, a notice providing new guidance for the Health Coverage Tax Credit. The Health Coverage Tax Credit under Section 35 of the Internal Revenue Code provides an income tax credit for a percentage of the amount paid for health insurance coverage by eligible taxpayers. The credit was created to help pay the cost of private health coverage for displaced workers certified to receive certain benefits and individuals receiving certain pension benefits. The credit was allowed to expire in 2013, but was reinstated retroactively and extended through 2019 by the Trade Preferences Extension Act of 2015.

Notice 2016-2 provides updated information about who may claim the credit, the process and procedures for claiming the credit for 2014, and information for taxpayer who enrolled in a health insurance plan through the Health Insurance Marketplace.

Eligible taxpayers are allowed a refundable credit for 72.5% of the amount paid for qualified health insurance coverage for themselves and qualifying family members. Eligible taxpayers are persons receiving trade adjustments assistance under the Trade Act, participants in worker retraining programs under the Trade Act, or individuals who are 55 years of age or older and receive a pension from the Pension Benefit Guarantee Corporation. The most common health insurance coverage eligible for the credit includes COBRA, state-qualified health plans, and spousal coverage.

For taxpayers who were eligible for the credit in 2014, the taxpayer must file an amended return (1040X) to claim the credit. The updated instructions for Form 1040X include the steps necessary to receive the credit.

In 2015, the taxpayer must make an annual election on Form 8885 and file the Form with their 2015 income tax return. Form 8885 and its instructions are also updated for 2015.
For more information in the Notice see, Internal Revenue Service, Notice 2016-2, available at https://www.irs.gov/pub/irs-drop/n-16-02.pdf.

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