Obamacare, the Affordable Care Act, and Your Tax Return

Obamacare_Penalty

Beginning in 2014, the Affordable Care Act (“ACA”), also referred to as Obamacare, mandates health insurance coverage.

Businesses with 50 or more employees are mandated to provide health insurance coverage to their employees, or pay penalties.

Individuals that are not provided health insurance coverage by their employer are mandated to obtain insurance coverage on their own, or pay penalties.

The focus of this article is related to the individual’s mandate and related penalties. In summary, on your Federal income tax return, you will:

  • Report whether or not you were in compliance with Obamacare coverage,
  • If not compliance, provide any penalty exceptions you may qualify for,
  • Compute the penalty associated with non-compliance (this may be more than you thought!)
  • Increase your taxes owed, or reduce refunds, by the amount of penalty.

Minimum Coverage Requirement

As mentioned above, Individuals that are not provided health insurance coverage by their employer are mandated to obtain insurance coverage for themselves and their household members.

Exceptions

If the required coverage was not provided, you may qualify for exceptions. The Exceptions are categorized in three areas:

I – Marketplace-Granted Coverage Exemptions for Individuals

II – Coverage Exemptons for Household due to low household income

III – Coverage Exemptions for Individuals Claimed…

A – Coverage is Considered unaffordable

B – Short coverage gap

C – Citizens living abroad & certain noncitizens

D – Members of a health care sharing ministry

E – Members of Federally-recognized Indian tribes

F – Incarceration

G – Economic hardship

H – Ltd benefit Medicard & TRICARE programs/Fiscal yr employer-sponsored-plan

Non-Compliance Penalty

If you do not qualify for an exception, the penalty for non-compliance is computed based on the number of non-covered household members and your income. It is also scheduled to increase in amount quickly over the next two years:

Obamacare_Penalty_Table

Most people have heard about the $95 per person penalty. The amount is for each adult. Half the amount is applied to children.

Example 1  – Married couple with two minor children and income up to about $48,000… Penalty would be $285. (2 adults + 2 children at 1/2 each is 3 x $95)

Note that the per person penalty computation is the minimum. If your income is high enough, the penalty is computed on 1% of your income.

Example 2  – Married couple with two minor children and income of $60,000… Penalty would be $397. ($60,000 less “their” applicable Filing Threshold* amount of $20,300 = $39,700 x 1% = $397).

* Filing Thresholds are listed at the bottom of this document.

Note that the penalty is a capped, but it doesn’t really help. The penalty cap is equal to the cost of the national average premium for a bronze level health plan available through the Marketplace. For 2014, this amount is $2,448 per individual and $12,240 for a family of five or more.

Example 3 – In our example of a married couple with two minor children, the capped penalty of $9,792 ($2,448 x 4) would not be reached until their income was almost $1,000,000.

Payment of Penalty and IRS Penalty enforcement

The penalty is reported on your income tax return, either increasing the amount you owe, or reducing any refund.

But here an interesting nuance: The Affordable Care Act prohibit the IRS from levies or liens to collect any individual shared responsibility payment.  What this means for you is that the IRS can only force payment by offsetting the penalty amount against a tax refund. If the amount of the tax you owe is increased, and you only pay the amount of tax liability before the addition of the penalty, the ACA currently is not allowed to levy or place a lien on your accounts to collect the penalty. It should be noted that you should still expect collection activity and it is still unknown what other actions the IRS might pursue in collecting unpaid Obamacare penalties.

 

2014 Federal Tax Filing Requirement Thresholds

Filing Status / Must File a Return If Gross Income Exceeds

Single   

  • Under 65             $10,150
  • 65 or older          $11,700

Head of Household         

  • Under 65             $13,050
  • 65 or older          $14,600

Married Filing Jointly      

  • Under 65 (both spouses)                $20,300
  • 65 or older (one spouse)                $21,500
  • 65 or older (both spouses)             $22,700

Married Filing Separately

  • Any age                $3,950

Qualifying Widow(er) with Dependent Children    

  • Under 65             $16,350
  • 65 or older          $17,550

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