A Brief Introduction to the Affordable Care Act’s Tax Implications

If you haven’t heard about the Affordable Care Act—better known as Obamacare—in the last 5 years then you must have been living under a rock. This healthcare legislation was signed into law by President Obama in 2010 in order to help increase the accessibility to affordable healthcare for Americans nationwide. And like it or not, it is the law of the land and you must adhere to its requirements, including the tax implications.

2016 is a big year when it comes to the Affordable Care Act and what it means for your taxes. In order to provide an incentive to ensure that every American is protected with health insurance coverage, the ACA provides for tax consequences as a result of failing to obtain and maintain health insurance coverage. The penalties for failing to get coverage have changed this year, and we have explained what you need to know below:

Understanding ACA Penalties

2016 will see a significant increase in the potential penalties for individuals who choose not to get health insurance coverage. ACA penalties come in the form of either a percentage of your household income or a flat fee—whichever is higher. For 2015, if you failed to get health coverage, you will either be required to pay a penalty of $325 per uncovered adult and $162 per uncovered child (up to a maximum of $975 per household), or you will have to pay a penalty of 2% of your annual household income. For the 2016 tax year, those the flat fee penalty will more than double to $695 per adult and $347 per child (up to $2,085 per household), or 2.5% of your annual household income.

Clearly, these are extremely significant penalties with the potential to cause you serious financial strain. There are, however, some exceptions to the requirement to pay a penalty if you fail to maintain health coverage throughout the year. These exemptions are based on factors like financial hardships and religious affiliations amongst other possible scenarios. To find out if you qualify for an exemption you should consult with a knowledgeable tax professional like Lydia Desnoyers of Desnoyers CPA.

Understanding the Premium Tax Credit

Fortunately, the ACA does recognize the financial strain purchasing health insurance can have on a family and it does not seek to penalize those who are unable to afford health care on their own income. The ACA provides for an advance premium tax credit for qualifying individuals who meet certain income standards. When you apply for health insurance through the government marketplace—and ONLY through the government marketplace—you will be asked to provide an estimate of your income for the upcoming year. Based on your income and ability to afford healthcare, you may qualify for the advance tax credit. If you do qualify, the government will advance a percentage of your required premium directly to the health insurance provider on your behalf in order to lower your cost burden. However, since the tax credit is granted in advance of you actually having to pay taxes, you will have to reconcile the credit come tax time. If your estimated income turns out to be more than what you actually made, you may end up owing more taxes in order to repay some or all of the premium tax credit you receive from the government. If your estimated income turns out to be lower than your actual income, you may actually receive money back in the form of an increased refund.

Understanding how the Affordable Care Act will impact your taxes can be a complex process. The legislation is still relatively new, and details have the potential to change often. If you want to avoid serious tax penalties, make sure you purchase health insurance each year during the Open Enrollment period. If you want to potentially take advantage of premium tax credits, be sure to enroll through the government marketplace. And if you want to ensure you are compliant with your ACA tax obligations, contact Desnoyers CPA and let us guide you with all of your tax needs.

Written by Desnoyers CPA

Desnoyers CPA

Known for her friendly, outgoing nature and her rare talent for financial foresight, Lydia Desnoyers has been serving individuals and small businesses in Florida since 2010. After earning her Master’s Degree in Accounting from Nova Southeastern University and her Bachelor’s Degree in Accounting from Florida State University, she became a Certified Public Accountant and a Certified Fraud Examiner.

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