2016 INCOME TAXES: OBAMACARE & TRUMP’S EXECUTIVE ORDER

by Rick Howard, CMA, CPA

2/17/2017

The Affordable Care Act, referred to as “Obamacare”, imposes a penalty for taxpayers who do not have the required health care coverage.  President Trump signed an Executive Order directing the authority and discretion to “waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on…” most anyone (the order had a long list).

While Trump clearly sent a directive that the Obamacare penalty needs to be addressed, there has been uncertainty about how this will effect 2016 Income Tax filings. The IRS was rejecting tax returns earlier this year if taxpayers didn’t disclose health care coverage. Without this information, the IRS cannot compute and verify, or assess, the penalty for inadequate health care coverage. On February 6th the IRS reversed this position. It is now accepting 2016 tax returns even if information as to health care coverage is missing.

Obamacare is still law along with its penalty provisions. Depending on what finally happens with the actual law, the IRS could still go back on filed returns and require taxpayers to provide health care coverage information and assess penalties.

What should you do with your 2016 Income Tax? Can you file your tax return anticipating that penalties associated with Obamacare will be officially changed by Congress retroactive to 2016?

If you had adequate health care coverage in 2016, this will not affect you. Check the “Full-year coverage” box and file your tax return as you normally would.

If you had partial or no coverage, you have two options. First, you can follow the existing rules and submit the tax return with the Obamacare penalty computed. If you have a refund coming, the refund will be reduced by the penalty. If you do not have a refund, you have the additional option to pay only the amount of taxes due without paying the Obamacare penalty. One of the unique rules about this penalty is that the IRS cannot assess a further penalty or interest on it, and they can only collect it by offsetting refunds.

Second, you could ignore the Obamacare rules and submit the tax return without disclosing health care coverage or penalty computations.  Currently, the IRS says they will process your return. The risk is that the IRS could follow-up later. Trying to address tax issues subsequent to the tax return’s filing can be time consuming and very frustrating.

Dealing with taxes can be challenging and the added uncertainty of the Obamacare penalty makes it more so. Quick action by Congress is what is needed most. Until then, talk to your tax advisor and make sure you fully understand your choices and the associated implications.