Joint Committee Report JCS-1-16: General Explanation of Tax Legislation Enacted in the 114th Congress

Eligible coverage months

In the case of an eligible individual, a refundable tax credit is provided for 72.5 percent of the individual's premiums for qualified health insurance of the individual and qualifying family members for each eligible coverage month beginning in the taxable year.³³ The credit is commonly referred to as the health coverage tax credit ("HCTC"). The credit is available only with respect to amounts paid by the individual for the qualified health insurance.

Eligibility for the credit is determined on a monthly basis. In general, an eligible coverage month is any month if (1) the month begins before January 1, 2014, and (2) as of the first day of the month, the individual is an eligible individual, is covered by qualified health insurance, the premium for which is paid by the individual, does not have other specified coverage, and is not imprisoned under Federal, State, or local authority. In the case of a joint return, the eligibility requirements are met if at least one spouse satisfies the requirements.

Eligible individuals

An eligible individual is an individual who is (1) an eligible Trade Adjustment Assistance ("TAA") recipient, (2) an eligible alternative TAA recipient or an eligible reemployment TAA recipient, or (3) an eligible Pension Benefit Guaranty Corporation ("PBGC") pension recipient. In general, an individual is an eligible TAA recipient for a month if the individual (1) receives for any day of the month a trade readjustment allowance under the Trade Act of 1974 or would be eligible to receive such an allowance but for the requirement that the individual exhaust unemployment benefits before being eligible to receive an allowance and (2) with respect to such allowance, is covered under a required certification. An individual is an eligible alternative TAA recipient or an eligible reemployment TAA recipient for a month if the individual participates in a certain program under the Trade Act of 1974 and receives a related benefit for the month. Generally, an individual is an eligible PBGC pension recipient for any month if the individual (1) is age 55 or over as of the first day of the month and (2) receives a benefit for the month, any portion of which is paid by the PBGC. A person who may be claimed as a dependent on another person's tax return is not an eligible individual. In addition, an otherwise eligible individual is not eligible for the credit for a month if, as of the first day of the month, the individual has certain specified coverage, such as certain employer-provided coverage or coverage under certain governmental health programs.

Qualified health insurance

Qualified health insurance eligible for the credit is: (1) coverage under a COBRA continuation provision;³⁴ (2) State-based continuation coverage provided by the State under a State law that requires such coverage; (3) coverage offered through a qualified State high risk pool; (4) coverage under a health insurance program offered to State employees or a comparable program; (5) coverage through an arrangement entered into by a State and a group health plan, an issuer of health insurance coverage, an administrator, or an employer; (6) coverage offered through a State arrangement with a private sector health care coverage purchasing pool; (7) coverage under a State-operated health plan that does not receive any Federal financial participation; (8) coverage under a group health plan that is available through the employment of the eligible individual's spouse; (9) coverage under individual health insurance³⁵ if the eligible individual was covered under individual health insurance during the entire 30-day period that ends on the date the individual became separated from the employment which qualified the individual for the TAA allowance, the benefit for an eligible alternative TAA recipient or an eligible reemployment TAA recipient, or a pension benefit from the PBGC, whichever applies ("30-day requirement"); and (10) coverage under an employee benefit plan funded by a voluntary employee beneficiary association ("VEBA")³⁶ established pursuant to an order of a bankruptcy court (or by agreement with an authorized representative).³⁷

Qualified health insurance does not include any State-based coverage (i.e., coverage described in (2)-(7) in the preceding paragraph) unless the State has elected to have such coverage treated as qualified health insurance and such coverage meets certain consumer-protection requirements.³⁸ Such State coverage must provide that each qualifying individual is guaranteed enrollment if the individual pays the premium for enrollment or provides a qualified health insurance costs eligibility certificate and pays the remainder of the premium. In addition, the State-based coverage cannot impose any pre-existing condition limitation with respect to qualifying individuals. State-based coverage cannot require a qualifying individual to pay a premium or contribution that is greater than the premium or contribution for a similarly situated individual who is not a qualified individual. Finally, benefits under the State-based coverage must be the same as (or substantially similar to) benefits provided to similarly situated individuals who are not qualifying individuals.

A qualifying individual for this purpose is an eligible individual who seeks to enroll in the State-based coverage and who has aggregate periods of creditable coverage³⁹ of three months or longer, does not have other specified coverage, and is not imprisoned. However, State-based coverage that satisfies any or all of the consumer-protection requirements for State-based coverage with respect to all eligible individuals is also qualified health insurance for purposes of HCTC.⁴⁰

Qualified health insurance does not include coverage under a flexible spending or similar arrangement or any insurance if substantially all of the coverage is for excepted benefits.

Advance payment of HCTC

The credit is available on an advance payment basis by means of payments by the Department of the Treasury ("Treasury") once a qualified health insurance costs credit eligibility certificate is in effect.⁴¹ In some cases, Treasury may also make retroactive payments on behalf of a certified individual for qualified health insurance coverage for eligible coverage months occurring before the first month for which an advance payment is otherwise made on behalf of the individual. With respect to any taxable year, the amount which is allowed as HCTC for an eligible individual for a taxable year is reduced (but not below zero) by the aggregate amount of advance HCTC payments on behalf of the eligible individual for months beginning in the taxable year.

Premium assistance credit

For taxable years ending after December 31, 2013, a refundable tax credit (the "premium assistance credit") is provided for eligible individuals and families who purchase health insurance through an American Health Benefit Exchange.⁴² The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an American Health Benefit Exchange.

The premium assistance credit is available for individuals (single or joint filers) with household incomes between 100 and 400 percent of the Federal poverty level ("FPL") for the family size involved who are not eligible for certain other health insurance. The premium assistance credit amount is generally the lower of (1) the premium for the qualified health plan in which the individual or family enrolls, and (2) the premium for the second lowest cost silver plan⁴³ in the rating area where the individual resides, reduced by the individual's or family's share of premiums.

If the premium assistance credit received through advance payment exceeds the amount of premium assistance credit to which the taxpayer is entitled for the taxable year, the liability for the overpayment must be reflected on the taxpayer's income tax return for the taxable year, subject to a limitation on the amount of such liability. For taxpayers with household income below 400 percent of FPL, the liability for the overpayment for a taxable year is limited to a specific dollar amount which varies depending on the taxpayer's household income as a percentage of FPL.

The provision amends the definition of eligible coverage month for HCTC purposes to include months beginning before January 1, 2020, if the requirements for an eligible coverage month are otherwise met.⁴⁴

Election of HCTC

In order to coordinate eligibility for the premium assistance credit with eligibility for HCTC, under the provision, to be eligible for the HCTC for any eligible coverage month during a taxable year, the eligible individual must elect the HCTC. Further, except as the Secretary of Treasury may provide, the election applies for that coverage month and all subsequent eligible coverage months during the taxable year, must be made no later than the due date, with any extension, for filing his or her income tax return for the year, and is irrevocable. Further, the period for assessing any deficiency attributable to the election (or revocation of the election, if permitted) does not expire before one year after the date on which the Secretary of Treasury is notified of the election (or revocation). The taxpayer is not entitled to the premium assistance credit for any coverage month for which the individual elects the HCTC.

Qualified health insurance

The provision eliminates the 30-day requirement as a requirement for individual health insurance to be qualified health insurance for purposes of the HCTC, but the provision adds a requirement that the individual health insurance not be purchased through an American Health Benefit Exchange.

The provision otherwise extends pre-2014 law for qualified health insurance, including the rules for State-based coverage, and the treatment of COBRA continuation coverage and coverage under certain VEBAs as qualified health insurance.

Advance payment

In the case of an eligible individual on whose behalf advance HCTC payment or advance premium assistance payment is made for months occurring during a taxable year and who subsequently elects HCTC for any eligible months,⁴⁵ the individual's income tax liability is increased by the amount of the advance payment, but then offset by the amount of the HCTC allowed to the individual.⁴⁶ If the individual on whose behalf the advance HCTC payment is made does not elect HCTC but instead claims the premium assistance credit for any coverage months, the increase in tax liability equal to the advance payment is offset by the amount of the allowable premium assistance credit, and any remaining tax liability attributable to the advance payment (and advance premium assistance payment, if any) is limited in the same way as if the advance HCTC payment had instead been advance premium assistance payment.

Under the provision, the Secretary of Treasury is directed to establish, no later than one year after date of enactment of the provision, a new program for making advance HCTC payments to providers of insurance on behalf of enrolled eligible individuals. The program shall only provide retroactive payments for coverage months occurring after the end of such one year period.

Agency outreach

The Secretaries of the Treasury, Health and Human Services, and Labor and the Director of the PBGC are directed to carry out programs of public outreach, including on the Internet, to inform potential HCTC-eligible individuals of the extension of HCTC availability and the availability of the election to claim such credit retroactively for coverage months beginning after December 31, 2013.

Under section 6050S of the Code, eligible educational institutions that enroll individuals for any academic period are required to furnish, both to the IRS and to the student, an information return known as Form 1098-T. Among the information the educational institution is required to remit is (i) either the aggregate amount of payments received, or the aggregate amount billed, for qualified tuition with respect to the student to whom the Form 1098-T pertains; and (ii) the aggregate amount of grants received by such individual for payment of costs of attendance that are administered and processed by the institution during the calendar year.

A penalty under section 6721 or 6722 of the Code may apply to a payee that fails to include the information required on the Form 1098-T.⁵⁷ The Treasury regulations provide for a waiver of the section 6721 and 6722 penalties in the case of institutions that fail to include a correct TIN of the student. Such institutions will not be liable for these penalties if the failure to include the correct TIN was due to reasonable cause.⁵⁸ Reasonable cause may be established if the failure arose from events beyond the institution's control, such as failure of the student to furnish a TIN. However, the regulations require that the institution establish that it acted in a "responsible manner" both before and after the failure. The Treasury regulations set out detailed guidelines regarding the solicitation of TINs by the institution for purposes of making this determination.

Any person who is required to file an information return, or furnish a payee statement, but who fails to do so on or before the prescribed due date, is subject to a penalty that varies based on when, if at all, the information return is filed. Both the failure to file and failure to furnish penalties are adjusted annually to account for inflation.

If a person files an information return after the prescribed filing date but on or before the date that is 30 days after the prescribed filing date, the amount of the penalty is $30 per return ("first-tier penalty"), with a maximum penalty of $250,000 per calendar year. If a person files an information return after the date that is 30 days after the prescribed filing date but on or before August 1, the amount of the penalty is $60 per return ("second-tier penalty"), with a maximum penalty of $500,000 per calendar year. If an information return is not filed on or before August 1 of any year, the amount of the penalty is $100 per return ("third-tier penalty"), with a maximum penalty of $1,500,000 per calendar year. If a failure to file is due to intentional disregard of a filing requirement, the minimum penalty for each failure is $250, with no calendar year limit.

Lower maximum levels for this failure to file correct information return penalty apply to small businesses. Small businesses are defined as firms having average annual gross receipts for the most recent three taxable years that do not exceed $5 million. The maximum penalties for small businesses are: $75,000 (instead of $250,000) if the failures are corrected on or before 30 days after the prescribed filing date; $200,000 (instead of $500,000) if the failures are corrected on or before August 1; and $500,000 (instead of $1,500,000) if the failures are not corrected on or before August 1.

Any person who is required to furnish a payee statement who fails to do so on or before the prescribed filing date is subject to a penalty that varies based on when, if at all, the payee statement is furnished, similar to the penalty for filing an information return discussed above. A first-tier penalty is $30, subject to a maximum of $250,000, a second-tier penalty is $60 per statement, up to $500,000, and a third-tier penalty is $100, up to a maximum of $1,500,000. Lower maximum levels for this failure to furnish correct payee statement penalty apply to small businesses. For purposes of the penalty, small businesses are firms having average annual gross receipts for the most recent three taxable years that do not exceed $5 million. The maximum penalties for small businesses are: $75,000 (instead of $250,000) if the failures are corrected on or before 30 days after the prescribed filing date; $200,000 (instead of $500,000) if the failures are corrected on or before August 1; and $500,000 (instead of $1,500,000) if the failures are not corrected on or before August 1.

In cases in which the failure to file an information return or to furnish the correct payee statement is due to intentional disregard, the minimum penalty for each failure is $250, with no calendar year limit. No distinction is made between small businesses and other persons required to report.

The provision also increases the lower maximum levels applicable to small businesses, as follows. The maximum penalties for small businesses are: $175,000 if the failures are corrected on or before 30 days after the prescribed filing date; $500,000 if the failures are corrected on or before August 1; and $1,000,000 if the failures are not corrected on or before August 1.

For failures or misstatements due to intentional disregard, the penalty per return or statement increases to $500, with no calendar year limit. As with present law, there is no distinction between small businesses and other persons required to report in such cases.

An individual may claim a tax credit for each qualifying child under the age of 17. The amount of the credit per child is $1,000.⁶⁴ A child who is not a citizen, national, or resident of the United States cannot be a qualifying child.⁶⁵

The aggregate amount of child credits that may be claimed is phased out for individuals with income over certain threshold amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns. For purposes of this limitation, modified adjusted gross income includes certain otherwise excludable income earned by U.S. citizens or residents living abroad or in certain U.S. territories, described below.⁶⁶

^{The credit is allowable against both the regular tax and against the alternative minimum tax ("AMT"). In addition, a taxpayer is allowed an "additional child tax credit" which is refundable to the extent the credit exceeds the taxpayer's income tax (reduced by non-refundable credits).67} The additional child tax credit is equal to 15 percent of earned income in excess of a threshold dollar amount (the "earned income" formula).⁶⁸ The threshold dollar amount is $3,000 for taxable years beginning before 2018 ($10,000 indexed for inflation since 2001 for taxable years beginning after 2017). For purposes of determining the additional child credit, earned income includes only earned income that is taken into account in determining taxable income. As a result, a citizen living abroad who earns more than the maximum section 911 exclusion (discussed below) will have residual earnings taken into account in determining taxable income, and thus will potentially be eligible for the additional child credit. For example, a married couple with earnings of $113,800 in 2015 would have earnings that exceeded the maximum section 911 exclusion by $13,000, or $10,000 in excess of the additional child credit refundability threshold of $3,000. If they had two qualifying children, the family would be potentially eligible for child credits of $1,800 ($200 of the otherwise allowed child credits is lost due to the income based phase-out of the child credit). The couple faces no U.S. regular income tax liability on the $13,000 against which to claim the credit. However, the couple is eligible for refundable child credits of $1,500 (15 percent of $10,000). In contrast to this couple, a couple earning less than the maximum section 911 exclusion and who claimed the exclusion would have no earnings taken into account in determining taxable income, and thus would not be eligible for the additional child credit. Thus certain higher income citizens working abroad face lower U.S. tax liabilities than lower income citizens working abroad.

Families with three or more children may determine the additional child tax credit using the "alternative formula," if this results in a larger credit than determined under the earned income formula. Under the alternative formula, the additional child tax credit equals the amount by which the taxpayer's social security taxes exceed the taxpayer's earned income tax credit ("EITC").

Earned income is defined as the sum of wages, salaries, tips, and other taxable employee compensation plus net self-employment earnings. Combat pay is treated as earned income taken into account in determining taxable income, regardless of whether it is excluded from gross income for other purposes.

Foreign earned income exclusion

A U.S. citizen or resident living abroad may be eligible to elect to exclude from U.S. taxable income certain foreign earned income and foreign housing costs.⁶⁹ This exclusion applies regardless of whether any foreign tax is paid on the foreign earned income or housing costs. To qualify for these exclusions, an individual (a "qualified individual") must have his or her tax home in a foreign country and must be either (1) a U.S. citizen⁷⁰ who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year, or (2) a U.S. citizen or resident present in a foreign country or countries for at least 330 full days in any 12-consecutive-month period.

The maximum amount of foreign earned income that an individual may exclude in 2015 is $100,800.⁷¹ The maximum amount of foreign housing costs that an individual may exclude in 2015 is, in the absence of Treasury adjustment for geographic differences in housing costs, $16,128.⁷² The combined foreign earned income exclusion and housing cost exclusion may not exceed the taxpayer's total foreign earned income for the taxable year. The taxpayer's foreign tax credit is reduced by the amount of the credit that is attributable to excluded income.