How does Obamacare affect my taxes?

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the patient protection and affordable care act

The Patient Protection and Affordable Care Act, ACA, or Obamacare is the government initiative signed into law by the president Barack Obama that requires all American citizens to have health insurance, except those who qualify for exception. Currently there are still millions of Americans without health insurance and the proposed penalties for those who remain uninsured are supposed to motivate them to look into purchasing the insurance.

What are the penalties and how they affect a tax return?

There are numerous options when it comes to insurance level that affect your out-of-packet cost for doctor visits and services received. Bronze coverage is the lowest level of coverage possible; it will cover 60% of your medical costs, and the other 40% are your responsibility. Silver, Gold, and Platinum will, respectively, cover 70%, 80%, and 90% of the cost.

The cost of Bronze coverage is about $1,650 per year for a single person or about $3,900 for a family. These amounts will vary because they depend on where you life, household size, or age, but for now they will be used as a reference point.

If you had a health insurance throughout the year, you will not have any penalties added on your tax return. In reality the IRS provided a 3-month window for people to get the coverage. Technically, you will avoid the penalties as long as you purchased or had the coverage before March 31.

How much are the penalties?

The minimum penalty is $95.00 per uninsured taxpayer. It can be up to 1% of your income but no more than what the Bronze coverage would cost you (in our hypothetical case $1,650) – Here’s a example:

  • Single taxpayer with income of $40,000/year => in this case $95.00 is the minimum you can expect to pay but since1% of your income is $400 and that amount is greater than the minimum penalty, you penalty at tax time would be $400.
  • Single with income of $200,000/year => $95.00 is the minimum you can expect to pay but 1% of your income is $2,000. In our scenario your maximum penalty would be capped at $1,650, which is the cost of the Bronze plan.
  • Family with 3 kids and household income of $90,000 => minimum penalty is $95 per adult plus $47.50 per each child, up to $285 per family. Penalty range: $285.00 – $3,800 (approximate cost of the Bronze plan). Based on income amount your penalty will be $900.00. No matter how much you earn, it cannot be higher that the cost of the Bronze coverage.

What about the next year?

For the 2015 tax year the penalties for uninsured taxpayers will rise. Unless you can claim an exemption, the minimum penalty will increase from $95.00 to $325 for uninsured adult and $162.50 per uninsured child or 2% of your household income. In 2016 this amount will increase again and adjust upward for inflation every year after that.

The penalty amount also takes in to consideration number of months you or your dependents were uninsured. If you were uninsured for less than 3 consecutive months, you won’t face penalties for that period. This is called a short gap. If there are other short gaps in your health coverage during the year, you will only be exempt from penalty related to the first gap.

How much does the Bronze coverage cost?

As mentioned before, the cost of insurance will vary. To get the best estimate, visit https://www.healthcare.gov/get-coverage/ . This is the first step to get to the Marketplace for health insurance.

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