With the recent implementation of the Affordable Care Act, many Americans have been left wondering exactly how these new laws and mandates will affect their taxes. Unfortunately, choosing to simply ignore the new law will require you and your family to pay a penalty to the government, beginning at either $95 or 1.0% of your total income per person in 2014. These penalties are only expected to increase, so it is important that you fully understand the requirements of the Affordable Care Act and how these mandates will affect your taxes in the future.
1) Possible Tax Credits
The Affordable Care Act acknowledged that mandating health insurance coverage could cause a financial hardship with some Americans, as not everyone may be able to pay for the cost of health insurance even with the more affordable rates. For this reason, certain people may be able to earn tax credits that can help them to pay for the health insurance that is required of them. Specifically, people who earn 133%-400% of the federal poverty level may be eligible for these incentives, which is one of the most positive ways that the Affordable Care Act can impact taxes.
2) Individual Mandate and Exemptions
The individual mandate is an Affordable Care Act requirement that makes it a legal necessity that Americans obtain health insurance or pay a penalty. The penalty for not having health insurance coverage is paid on federal income tax returns for each month that you or your family members don’t have health insurance. To avoid the penalty, you will need to enroll in minimum essential coverage during the ACA open enrollment period and maintain it throughout the entire year, or you will need to obtain an exemption.
There are several scenarios in which you may qualify for an exemption and can avoid the penalty for not having insurance:
- The lowest-priced health insurance coverage available to you would cost more than 8.05% of your total household income.
- You aren’t required to file an income tax return because of your income level.
- You live in a state that did not expand the Medicaid program, but had it, you would have qualified.
- You didn’t have insurance for fewer than two consecutive months throughout the year.
If you feel that you may qualify for an exemption, be sure to contact an accountant or another professional that provides help with taxes for more information.
3) Applying for an Exemption
If you feel that you might be eligible for an exemption, it is important to plan ahead so that you can be ready to show evidence of this when it comes time to do your taxes. Most exemption requests will need to be submitted via a paper application to the Marketplace, and tax debt relief experts estimate that it will take two weeks to process an application. Other exemptions can be claimed directly on your tax return, and Marketplace and IRS websites contain lists of where to apply for each exemption.
If you have applied for medical insurance coverage through the HealthCare.gov website, you will automatically be considered for an exemption. If you are eligible, you will receive a letter containing your exemption certificate number. It is important to ensure this number is entered on your federal tax return. You can also apply for exemptions retroactively, but they can take much longer to process.
4) If You Have Other Health Insurance
Many people have their health care needs met by carrying medical insurance offered through their employer or the employer of their spouse. If you are one of these people, you may be wondering how the Affordable Care Act might affect your taxes, and the easy answer is that it probably won’t. If you and your family have minimal essential coverage via Medicaid, your job, Medicare, or Cobra, you’ll simply check this in the box on your 1040 tax return found on line 61. This will indicate that you have had coverage for the year in its entirety. People who purchased health insurance through a state or federally-run marketplace and did not receive premium subsidies should also follow the same step.
What can become problematic is if you only had health insurance through your employer for part of the year. If you went without insurance for more than three months in a row and didn’t qualify for an exemption over that time period, you may not have complied with the mandate. This could result in you owing a partial penalty on your federal tax return.
Understanding tax laws is an incredibly complex area on its own. When you add in the new mandates that come with the Affordable Care Act, the topic can become even more complicated. If you have questions about how your taxes might be affected by these new laws, seek out the assistance of an experienced tax professional.
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Originally published Aug 19, 2015, updated Aug 10, 2020