The Affordable Care Act (ACA, or Obamacare if you prefer) has probably had a significant impact on your health insurance. Did you realize that Obamacare has had an effect on your taxes as well? Here are a few of the tax ramifications of the ACA.
- Individual Mandate – If you are aware of only one ACA-related impact on your taxes, it is probably this one. You are required to have a qualified health insurance plan through some source — the federal exchange at healthcare.gov, a state exchange, employer, or direct purchase from an insurer. Qualified plans are those that meet minimum criteria as outlined by the ACA. The individual insurance mandate was abolished in the Tax Cuts and Jobs Act of 2017; however, this change doesn't take effect until 2019.
The penalty for not having insurance for the 2017 tax year is the greater of $695 per adult in the household and $347.50 per child up to $2,085 for a family, or 2.5% of household income above the threshold to file a tax return for your filing status up to the cost of the national average premium for the least-expensive bronze plan in a market. Every month without suitable insurance coverage incurs one month's worth of the penalty, although short gaps could be exempted.
To verify your status, you will receive a 1095 form — either A, B, or C depending on the source of your insurance. 1095-A forms are supplied by the federal exchange and are necessary to fill out tax forms if you purchased coverage through the exchange. Insurers provide 1095-B forms, while employers supply 1095-C forms. Neither B nor C forms are necessary for you to fill out your taxes.
- Premium Tax Credit – This is another name for the subsidies that help low-income families who purchased health care through healthcare.gov. The subsidies are tax credits that can be taken when you file your tax return or taken in advance and sent to your insurance provider to help with the premium costs.
If you take the premium tax credit in advance, it will be based on an estimate of your income for the year as well as your family size. If things change during the year such as the birth of a child, divorce, loss of a job, or an increase in salary, the actual subsidy for which you qualify will be different from what you have received. You could end up owing on your taxes effectively to refund an excess subsidy. Notify the exchange as soon as any of these changes takes place to limit the effect on your taxes.
- Net Investment Income Tax (NIIT) – To partially pay for ACA provisions, a 3.8% surtax was added to various earnings on investments above $250,000. This has subtle implications for wealthier taxpayers. The calculations are not at all straightforward. See the IRS webpage "Questions and Answers on the Net Investment Income Tax" for details.
- Medicare Tax – Further funding for Obamacare is provided by an increase in the Medicare tax on higher-income taxpayers who earn $250,000 with married filing jointly status that took effect in 2013. (Limits are $125,000 if married filing separately or $200,000 if filing single). For those with incomes beyond that mark, a 0.9% tax was added to the employee component of your tax contribution (the employer's portion does not change).
Other changes are to come, such as the "Cadillac Tax" on health care spending beyond a prescribed upper end on health insurance plans starting in 2022. The rules change often, so keep an eye out for future tax impacts of the ACA.
Verify your web searches with multiple sources, as the articles at the top of your search may not have the most recent information. Keep on top of the tax ramifications of the ACA, and you will be less likely to receive nasty surprises at tax time. You wouldn’t want an unexpected tax bill to trigger a need for medical care!
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