The health care reform law known as the Affordable Care Act may directly affect your tax liability. Many taxpayers are familiar with the requirement that most Americans either carry health insurance or pay a tax penalty. But that's just one provision, and knowing what else is in the law can help you avoid surprises come tax time.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
The individual mandate for coverage
A centerpiece of the Affordable Care Act is what's commonly referred to as the "individual mandate," which requires people to either have health insurance that provides an "minimum essential" level of benefits, receive an exemption, or pay a fee at tax time.
In general, you and your dependents meet the requirement if you're covered by:
- A plan offered by an employer;
- Medicaid (or another state run plan that replaces Medicaid in your state);
- The Children's Health Insurance Program;
- Veterans Affairs health benefits;
- Tricare for military members and their families; or
- Individual insurance plans that provide at least a "bronze" level of benefits, as defined by the ACA.
If you're not sure whether your coverage qualifies, ask your plan provider.
Who is exempt from the individual mandate?
Some people are exempt from the mandate, meaning they don't have to pay a penalty if they aren't insured. They include:
- Those whose income is so low that they aren't required to file a tax return;
- Those who would have to pay more than 8 percent of their income for insurance, after taking into account subsidies and other aid;
- Members of religious groups whose beliefs prohibit health insurance benefits;
- Incarcerated individuals;
- Undocumented immigrants; and
- Members of Native American tribes.
Not sure if you are exempt from the tax penalty or from the requirement to purchase health insurance? See "Are You Exempt From Health Care Coverage?" to help determine whether you might be eligible to waive the tax penalty entirely and apply for a health care exemption.
How tax penalties are figured
Tax penalties apply when you don't have health coverage and don't qualify for an exemption. The law set the penalties to begin with the 2014 tax year (the taxes due in April 2015), with the penalties to be phased in over three years.
The exact amount of your penalty, if one applies, depends on how many people in your household were not covered by insurance, how long they were without coverage, and your household income. For example, in the second year, 2015, the basic penalty was set at $325 for each uninsured adult and $162.50 for each uninsured child, up to a maximum of $975 for a family or 1 percent of household income, whichever was more.
For years 2016 and on, the rates climbed to 2.5 percent of income or $695 per uninsured adult. After 2016, annual rates can be adjusted for inflation. If you are uninsured for only part of the year, the penalty is prorated to cover only your uninsured months. You're not assessed a penalty for a gap in coverage less than three months long. This is called a “short gap.” However, you are only allowed one short gap per year.
You calculate and pay any penalty when you file your tax return; TurboTax can help calculate what penalty, if any, that you owe.
Complications with health care subsidies
The law makes subsidies available for people to buy health coverage through online exchanges if their income is below a certain amount. The subsidies come as tax credits, which you can receive in advance. "This is great if you need to buy coverage on your own," says Carrie McLean, director of customer care for eHealth, the country's largest private online insurance exchange.
But McLean warns that subsidies are provided based on a person's estimated income for the year. If you receive a subsidy but end up earning more than expected, you may have to repay some or all of the subsidy at tax time. If you receive a subsidy, McLean says, you may want to keep an eye on your income and adjust or stop your subsidy if your income rises during the year. This can be done through the exchanges.
Additional taxes at higher incomes
The Affordable Care Act also imposes two new taxes in addition to new reductions to exemptions and itemized deductions on people with higher income. The first new tax is the Net Investment Income Tax, which was added to the bill to help offset the costs of the law's major provisions. It's a 3.8 percent tax on investment income—such as interest, dividends, capital gains, rents and royalties—that kicks in when income tops $200,000 for single people, $250,000 for married couples.
The second ACA tax on high-income individuals is the Additional Medicare Tax, a 0.9 percent tax on wages in excess of $200,000 for single people, $250,000 for married couples filing jointly.
Employers are supposed to withhold Additional Medicare Tax from wages – but married couples should be aware that there are circumstances when they might not, says Timothy Gagnon, a tax attorney and instructor at the D'Amore-McKim School of Business at Northeastern University (http://taxation.neu.edu/). Say each spouse earns $150,000 a year. Neither earns enough to automatically trigger withholding. "But together they make $300,000, so $50,000 is subject to the 0.9 percent (tax) on their tax return," Gagnon says. If you are in this situation, you may want to ask your employer to adjust your withholding.
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