The Affordable Care Act – How Will It Affect Your Taxes

by Terry Watson | January 9th, 2015
Photo by Mykel Media

Photo by Mykel Media

That is the question on everyone’s mind. With all of the problems associated with the enrollment process, there is bound to be some confusion. If you did not have health insurance for 2014, consider this: Unless you can prove you have a valid excuse, you will be liable for a penalty during this tax season and if you have not already taken the time to start explaining your circumstance the time is now. Another thing, individuals who purchased subsidized insurance through the marketplace may have new tax forms to complete, while paying the penalty itself may demand some serious calculations.

The Affordable Care Act includes a penalty provision (the Individual Shared Responsibility Payment), that will affect taxpayers for the first time this year and can only be reconciled through a person’s tax return. For most taxpayers, according to the Internal Revenue Service (IRS) who had qualifying health care coverage also known as minimum essential coverage will simply have to check a box on their tax return indicating they had insurance for the full year. However, millions of others who did not, they will have to deal with new tax forms and calculations that may generate unexpected results. For instance, most of the 6.7 million people who purchased insurance through the exchanges received subsidies, which reduced their monthly premiums. The subsidies were based on their 2013 income, so people whose incomes have changed will inevitably have to pay some of that money back, while others may receive bigger refunds. Paying the penalty may also deliver some surprises. People who did not maintain or who did not qualify for minimum essential coverage must make an individual shared responsibility payment with their federal tax return.

COVERAGE EXEMPTIONS: Consumer advocates said they were concerned that some taxpayers might not have realized that they needed to apply for certain exemptions, and, in some cases, substantiate their circumstances. Some exemptions according to the IRS must be applied for through the exchanges, while others can be claimed only on individual income tax returns and some can be granted through either channel, for a complete list where you can apply, taxpayers should visit the and websites. For example: individuals who could not find affordable coverage costing eight percent of household income or less may claim that exemption on their tax returns.

But, the most time-consuming exemptions require mailing a signed paper application to the exchanges; they are processed manually, which can take a couple of weeks. Those exemptions include several hardships, such as foreclosure, the death of a family member, unpaid medical bills, and eviction, as well as religious reasons for not using insurance. If you have not applied already, do it now because the process can be lengthy. Particularly, because the IRS has announced that they will start accepting returns on January 20, 2015. Once an exemption is approved the taxpayer is sent an exemption certificate number which should be entered on the tax return. If the application is not approved then the taxpayer can appeal.

PAYMENT: Uninsured people who cannot qualify for an exemption will be required to pay a penalty, also known as the individual shared responsibility payment. Taxpayers who went without insurance for more than three months may have to pay something. The penalties will rise sharply over the next couple of years, so taxpayers contemplating paying the penalty instead of buying insurance for the coming year should run those calculations soon or talk with a tax professional. Open enrollment on the health care exchanges runs from Nov. 15 to Feb. 15.

For the 2014 tax year, families pay whichever is more: a flat dollar amount of $95 per adult and $47.50 per child (under 18), a maximum of $285 per family or 1 percent of the portion of their modified adjusted gross income that exceeds the federal income tax filing threshold (which is generally $20,300 for married couples filing jointly). The penalty is calculated on a monthly basis so you will owe one-twelfth of the annual payment for each month you or a member of your household did not have coverage or an exemption. You can go three consecutive months without coverage before the penalty kicks in.

The IRS is prohibited from using liens or levies to collect any of the individual shared responsibility payment. It cannot criminally prosecute those who do not comply, either. But the IRS can deduct the penalty from any refund due. And, if a taxpayer isn’t owed a refund and fails to pay the penalty the amount will accrue interest and roll over into the following tax years. The IRS could continue to deduct the growing amount from any refunds due for 10 years, which is how long the agency is allowed to collect payments.

RECONCILING: Taxpayer who purchased subsidized insurance on the exchanges received what is actually an advance on a tax credit. Since the amount of help taxpayers received was based on their 2012 income, it will need to be reconciled against what they actually earned in 2014 particularly if they earned more or less and did not update their income data on the exchange. Some individual will be surprised that they may have to pay some of that money back, or at least have it deducted from what they would have received in a refund. Conversely, people who earned less money in 2014 and who received subsidies that were too small may receive a refund. Changes in life events such as: a divorce, marriage, a new child can also affect those numbers also. Taxpayers may be comforted that there are caps on the amount that must be paid back, though a family of four with a household income exceeding $94,200 would have to pay back the full amount if it received too much in premium subsidies. Even though, some taxpayers who are on the edge of losing premium subsidies may be able to reduce their incomes enough to qualify for the credits. For example, people can contribute to a retirement account like a 401(k), 403(b) or traditional I.R.A. An I.R.A. contributions for 2014 can be made up to April 15 for the 2014 tax year.

For more information on the Health Care Law: What’s New for Individuals and Families visit the website

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