Obamacare and Your Personal Tax Return
Although the Obama administration delayed the employer mandate to 2015 (firms with 50 or more full-time employees must provide affordable health insurance to workers or pay a stiff fine) the individual mandate’s start date wasn’t deferred.
Beginning January 1, everyone without health insurance for themselves and their dependents will owe a tax penalty if they fail to obtain health insurance after February 15, 2014. You don’t need to worry about this new law, if you already have health coverage provided by an employer; or are covered by Medicare, Medi-Cal/ Medicaid, Tricare or have veterans coverage.
You are exempted from the penalty if:
- Your share of the premium exceeds 8% of your household’s AGI (less any federal tax credit for buying insurance);
- The total income of your household is below level needed to file tax return;
- You are without coverage for less than three months;
- You can show that a hardship forced you to go without coverage; or
- You belong to a religious group that opposes private or public insurance.
The penalty for being uninsured is the higher of two amounts:
- $95 per adult (2014) and $47.50 for each family member under the age of 18 with a $285 ceiling; or
- 1% of the excess of your household’s AGI over the minimum level of AGI needed to trigger filing a tax return.
The penalty will be paid annually on your 1040 tax return and will be reduced proportionally for any months that you had coverage. For 2015 and 2016 the penalty will be significantly higher, but in no case can the tax exceed the cost of a bronze-level exchange plan for you and your household.
The Premium Tax Credit (PTC)
Some people will be eligible for a PTC to subsidize the cost of their health insurance. Qualification is based on income and family size. The amount of credit will be calculated by the new Health Insurance Exchanges. The credit is available only to
those who purchase their health insurance coverage through the federal or a state exchange.
People not eligible for the PTC
- Those who did not purchase their health insurance coverage through the federal or a state exchange;
- People covered by an employer plan;
- Households with income below the federal poverty rate (They will be eligible for free Medi-Cal/ Medicaid coverage);
- Those ineligible due to income/ family size disqualification; and
- People who file their tax returns using the Married Filing Separately filing status.
Two ways to claim the PTC (if eligible)
- Taking an advance pro-rata payment of your PTC to apply to monthly insurance premiums; or
- Taking the full PTC when you file your tax return for premiums that you paid out-of-pocket during the year.
- 1. Taking an advance payment of the PTC
At the beginning of the year, you can take an advance payment of the PTC based on your estimated income and family size for the year. Your estimated advance payment would be applied to your health insurance premiums every month. When you file your tax return the next year, you would calculate your actual PTC and reconcile it to your advance payment. If your income was higher than you estimated, you may owe more in taxes; if it was lower, you may be eligible for a tax refund.
- Taking the full PTC when you file your tax return
If you can afford to pay the health premiums, it is less problematic to simply pay your insurance premiums out-of-pocket each month and then claim the full PTC when you file your tax return (provided you are eligible).
Caution: Don’t take tax credits and insurance benefits without knowing the tax rules and regulations. If you claim more PTC than you are entitled to, you could owe a large tax bill to the IRS at the end of the year.
Work with a trusted tax advisor BEFORE you enroll in the new health exchanges, or it could cost your dearly.