What Form 8965 (2017) Is For
IRS Form 8965 is used to claim health coverage exemptions under the Affordable Care Act when a taxpayer or someone in the tax household lacked health insurance coverage during the year. The form helps determine whether the individual mandate applies or whether a shared responsibility payment can be waived based on household income, hardship, or affordability factors. Taxpayers attach IRS Form 8965 to a federal tax return such as Form 1040, Form 1040A, or Form 1040EZ.
This form applies to individuals filing federal income taxes who did not have qualifying health plans or receive marketplace-related documents, including Forms 1095-A, 1095-B, or 1095-C. It ensures the IRS has the correct information to evaluate income tax requirements and verify coverage exemptions.
When You’d Use Form 8965
Form 8965 is used when a taxpayer lacked health insurance coverage for one or more months and qualifies for a Coverage Exemption, such as a low yearly income, short coverage gaps, or unaffordable healthcare premiums. It is also used when the marketplace plans to issue or deny an Exemption Certificate Number that needs to be reflected on a tax return. Individuals filing Form 1040NR or Form 1040NR-EZ may also use this form when subject to the individual mandate.
Taxpayers who filed a tax return and later discovered an exemption may file Form 1040X to correct the return and avoid an unnecessary Obamacare penalty. Situations involving premium tax credit adjustments through Form 8962 or updated household income calculations often require an amended federal tax return.
Key Rules or Details for 2017
For 2017, health plans were considered unaffordable when required contributions exceeded 8.16 percent of household income. Taxpayers could confirm affordability through the IRS Individual Shared Responsibility Payment Estimator or review marketplace information provided on Form 1095-A, Form 1095-B, or Form 1095-C. Those with a low yearly income below the filing threshold were exempt from the shared responsibility payment.
Additional rules included exemptions for short coverage gaps, certain hardship events, and situations influenced by the Federal Poverty Level. Households using student health insurance coverage, living abroad, or enrolled in specialized marketplace plans may also qualify for health coverage exemptions.
For more information about IRS assistance, including help with your tax questions and payment options, see this comprehensive guide.
Step-by-Step (High-Level)
Step 1: Confirm Whether the Form Is Required
A taxpayer must determine whether every member of the tax household had qualifying health insurance coverage for all twelve months. If everyone had coverage, the taxpayer could check the 'full-year coverage' box on Form 1040 and would not need to file Form 8965.
Step 2: Identify the Applicable Exemptions
Taxpayers should review the Coverage Exemptions section in the official IRS instructions. Supporting documents may include Form 1095-A, Form 1095-B, Form 1095-C, marketplace letters, or statements from health care providers.
Examples of exemptions include:
- The household qualifies for an exemption when household income falls below the filing threshold, which means no shared responsibility payment is required.
- The taxpayer may claim an exemption when health insurance coverage is considered unaffordable based on the affordability calculation.
- The taxpayer is eligible for an exemption when they experience a short gap in coverage lasting fewer than three consecutive months.
- The taxpayer may claim an exemption if they lived abroad or qualified for a marketplace-approved religious exemption.
- The taxpayer may be eligible for an exemption if their student health insurance coverage does not meet the minimum essential coverage standard.
Step 3: Complete the Sections of Form 8965
Part I is completed when the marketplace issues an Exemption Certificate Number. Part II is used when the household qualifies for a full-year exemption due to low household income. Part III lists exemptions claimed directly on the return, including exemption codes and the specific months to which they apply.
Step 4: Calculate Household Income
A taxpayer must calculate modified adjusted gross income and add dependent income when required. Correct income calculations help determine affordability and exemption eligibility accurately.
Step 5: Attach Form 8965 to the Tax Return
After completing the form, the taxpayer attaches it to Form 1040, Form 1040A, Form 1040EZ, or the equivalent nonresident forms and submits it with the full federal tax return.
Common Mistakes and How to Avoid Them
- Miscalculating household income: Include dependent income when required and add back items like tax-exempt interest; use IRS worksheets to ensure accurate calculations.
- Leaving out required exemption codes in Part III: Enter the correct letter code for each exemption to avoid processing delays or IRS notices.
- Checking both the full-year exemption box and monthly exemptions: Choose only one method as instructed—either full-year or individual months—to ensure consistent reporting.
- Assuming student health insurance qualifies as minimum essential coverage: Review Form 1095-B or the plan description to confirm whether the policy meets ACA requirements.
- Failing to amend a return when a marketplace exemption is denied: File an amended return so the shared responsibility payment is calculated correctly for late or updated determinations.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
After IRS Form 8965 is filed with a federal tax return, the IRS reviews the information to determine whether a shared responsibility payment applies or whether exemptions eliminate the penalty. If third-party documents such as Form 1095-A or employer-reported coverage conflict with the return, the IRS may request clarification. Taxpayers using software supported by Thomson Reuters, Netclient Cs, Client Portal systems, or accounting firms can track these updates.
If the marketplace later denies an exemption marked as pending, the IRS may adjust the taxpayer’s federal income taxes and issue a balance due notice. Taxpayers may respond by paying the amount or filing Form 1040X to claim a new exemption, update household income, or correct tax credits.
FAQs
What counts as minimum essential coverage for 2017?
Minimum essential coverage includes employer-sponsored plans, Medicare, Medicaid, CHIP, TRICARE, and most plans offered through the marketplace. Limited benefit plans do not qualify.
Can different household members use different exemptions?
Yes, each member of the tax household may qualify for different exemptions and for various months.
What if marketplace coverage were offered but unaffordable?
The unaffordability exemption applies when the required contribution exceeds 8.16% of the household income.
Do taxpayers need to keep documentation for exemptions?
Yes, individuals should keep marketplace letters, insurance statements, income documents, and related records for at least three years.
How should a denied marketplace exemption be handled?
A taxpayer can respond to an IRS notice or file an amended return with an updated Form 8965 if another exemption applies.
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