Understanding Obamacare And The Related Tax Return Penalties

By Evelyn M. Joiner, CPA, CDFA™  

By now everyone has heard of Obamacare. The Affordable Care Act (ACA), a.k.a. Obamacare, has changed the U.S. healthcare system significantly. One of the most confusing aspects of the ACA is the individual mandate. This mandate imposes penalties on those who choose not to obtain qualifying healthcare coverage. These penalties are paid each year when an individual files his/her income tax return.

If you do not have the required coverage, either through an employer or on your own, and you can afford health insurance but choose not to obtain coverage, you will pay a penalty. To avoid the individual mandate penalty, you must have minimum essential coverage under a qualifying health plan, or qualify for an exemption.

How Much Is the Penalty?

The calculation of the penalty can get a little complicated. The penalty for 2015 is paid when you file your tax return in 2016.  It will be the higher of two possibilities: (1) 2% of your household income or (2) $325 per adult and $162.50 per child under 18, with a maximum penalty of $975. If 2% of household income is higher than the $975, the penalty will be the higher 2% amount.

Each year, the penalty will continue to increase, with a maximum penalty equal to the total yearly premium for the national average price of a Bronze plan (the lowest premium healthcare plan offered) sold through the health insurance Marketplace (on www.healthcare.gov). For example, the penalty for 2016 more than doubles and the household income rate increases to 2.5%.

What Are the Exemptions?

If you should have qualifying health coverage, but you do not, there are several exemptions available to avoid the penalty. For example:

• The cost of the lowest qualifying plan is more than 8.05% of your household income.
• You do not have to file a tax return because your income is below the filing requirement.
• You were uninsured for no more than two consecutive months of the year.
• You qualify for a listed hardship exemption.

To learn more about these exemptions, and others, visit www.healthcare.gov. If you have suffered a listed hardship, you can complete a paper application requesting an exemption and mail it to the Marketplace.

Premium Tax Credits

The premium tax credit is a refundable credit designed to assist those with low or moderate income in affording health insurance purchased through the Marketplace. When you apply for coverage through the Marketplace, you will be informed of the amount, if any, of the premium tax credit for which you qualify.

You can apply some or all of this credit to offset your monthly insurance premiums. This is called an advance payment of the premium tax credit. Keep in mind, your credit will change if your income or family size changes. You should contact the Marketplace right away with any such changes to determine how the change affects you.

You must file a tax return and complete the required forms if you receive an advanced payment of the credit or to claim the credit on your tax return.

You should seek the advice of a qualified tax professional to ensure you are following the rules associated with the Affordable Care Act.

Open Enrollment for 2016 ends January 31, 2016 (however, coverage won’t start until March 1, 2016). To enroll for coverage or to obtain more information, visit www.healthcare.gov.

Evelyn M. Joiner, CPA, CDFA™ is a partner at the firm of Sparano, Vincelette & Joiner, CPAs in Wilmington. She started her accounting career in 1999, obtained her Master’s degree in Taxation, and is the only CDFA™ in Delaware who is also a CPA.  You can find her on LinkedIn at http://lnkd.in/dqjQm3y.