Insured through Obamacare? Prepare for a tax headache

If you're among the roughly 20 million people affected by the Affordable Care Act -- either because you bought insurance through health exchanges or will be subject to penalties or exemptions for failing to get coverage -- filing a tax return just got a lot harder. Indeed, potentially millions of people who never before had to file tax returns will now need to file as the result of the health law.

The ACA, better known as Obamacare, has put health insurance in reach for millions of Americans by setting up subsidies for those who otherwise couldn't afford to buy coverage. However, the subsidies that may appear to simply lower the cost of insurance premiums are actually "advance premium tax credits" that are paid directly to health insurers.

Because those credits are made on each taxpayer's behalf, it's up to individual taxpayers to determine whether the "advance payment" was too much or too little. Though many of these individuals have never had to file before -- they simply earned too little to be required to file -- they will now need to complete tax returns to reconcile the Obamacare subsidies they got with what they owe, according to the IRS.

Meanwhile, those who didn't buy insurance or had a lapse in coverage that exceeded three months will need to determine whether they're subject to a tax penalty. Both situations involve slogging through new forms and dozens of pages of instructions.

"If you didn't have any changes in your situation over the course of the year -- everyone was covered under the policy and your income is exactly the same as it was in 2013 -- it might not be that bad," said Mark Luscombe, principal tax analyst with Wolters Kluwer,Tax & Accounting U.S. "But if you had a change in circumstances or don't have a perfectly straightforward situation, the amount of time it takes to handle this will increase exponentially."

Why? If you received discounted insurance through a health exchange, you'll need to fill out the mind-boggling Form 8962. Although this two-page form officially has just 36 lines, there are actually 90 spaces on just the first page that need to be filed in -- up to six spaces for each official "line."

To put the correct figures in several of these spaces, you'll need to complete charts and worksheets found elsewhere in the 20-page instruction booklet. If you are, say, divorced and sharing expenses with your ex-spouse, you'll also need to fill out the second page of the form. Though this page has just seven lines, there are 37 spaces. Worse yet, according to the IRS, completing that page requires cooperating and sharing both insurance and tax information with your ex-spouse -- not exactly a walk in the park for those with acrimonious splits.

The IRS says it does not have an estimate of the time it will take taxpayers to fill out this form. Experts estimate that someone with a complex situation will spend more time on the 8962 than they will filling out all of their other tax forms combined.

"A lot of the complexity comes from the fact that the law seems to assume that everybody has a traditional family -- mom, dad, children -- all covered under the same policy," said Lindsey Buchholz, principal analyst with the Tax Institute at H&R Block. "If you don't have that, complying with the law is a lot more complicated."

Unfortunately, the IRS estimates that about half of the people who slog through all of these worksheets will get an additional unpleasant surprise -- they'll be forced to repay a portion of the subsidy. If you earned more in 2014 than in 2013, for instance, your subsidy amount was likely too much. This could increase your tax bill by thousands of dollars.

But if your income is below 400 percent of the poverty line, the repayment amount is capped at a maximum of $2,500 for a family and $1,250 for individuals (It could also less, depending on your income.)

The IRS estimates that about half of the roughly 6 million individuals who got subsidy payments for Obamacare got too much; the rest may actually get additional subsidy payments through boosted tax refunds.

What if you didn't get insurance through an ACA exchange? If you are covered elsewhere, either through an employer or a individual plan, you only need to check a box this year, tax officials say. (Next year, additional documentation will be required of everyone.) But if you have no coverage or had a lapse in coverage that lasted more than three months, you'll need to fill out the form 8965 to determine whether you owe a penalty or can qualify for an exemption.

On the bright side, this won't be that tough if you planned ahead, sais Anabel Marquez, an IRS spokeswoman in Los Angeles. That's because people who requested exemptions from the exchanges last year are likely to have exemption identification numbers. If you have one of those, all you need to do it plug it into the form and submit it with your tax return, she said.

No exemption number? Then you'll need to wade though the 8965 form to determine whether you qualify for an exemption. There are a lot of possible ways to qualify for an exemption. If you're a Native American, member of a qualified health care ministry, had only a short lapse in coverage or simply earned too little, for instance, you have no insurance requirement.

If none of the exemptions apply to you and you had no insurance coverage for four months or more, you'll need to pay a penalty. Determining how much requires more math. To calculate your penalty, you determine your modified adjusted gross income -- that's AGI, plus tax exempt interest and tax-free income from foreign employment (if any). Then multiply that number by 1 percent, divide the result by 12 and multiply by the number of months you went uninsured. Now compare that result to the flat fine of $95. You'll generally pay whichever amount is higher.

Don't feel smug if you got off easy. The penalties rise in future years.