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How Does Obamacare Affect Your Tax Return?

The Affordable Care Act (ACA), more commonly known as Obamacare, forces most uninsured individuals to purchase private health coverage or face a tax penalty. If you do not currently have employer sponsored health insurance or do not participate in a plan such as Medicare, without private coverage you must pay a health insurance penalty when you file your income tax return next year and beyond.

The Individual Mandate

The individual mandate is the most controversial portion of the ACA. It states that all legal residents must have basic health insurance coverage or pay a penalty to the Internal Revenue Service beginning in tax year 2014 (filing in 2015). The penalty, officially called the “shared responsibility” fee, is in effect for every month that you, your spouse and your dependents don’t have coverage. The fee amount depends on income and other factors that include the cost of “bronze level” coverage in your home state.

Those who meet certain exemptions, which include belonging to a religion that opposes medical care, incarceration, belonging to an Indian tribe, undocumented immigration status, and low family income relative to tax rules, do not have to pay a penalty. People who have Medicare or Medicaid, service member coverage, an employer sponsored plan, or a grandfathered plan can also avoid the penalty.

How the Obamacare Penalty Works

Those who have a modified adjusted gross income MAGI in 2013 exceeding $10,000 for an individual and $20,000 for a family are required to enroll in a plan with coverage beginning May 1, 2014. The Obamacare tax penalty starts in 2014 at $95 per adult and $47.50 per child and grows to 1 percent of MAGI, whichever is greater. It increases in 2015 to $325 per adult and $162.50 per child or 2 percent of MAGI, whichever is greater. It peaks in 2016 and every year after at a costly $695 per adult and $347.50 per child or 2.5 percent of MAGI – significant reasons to explore getting coverage.

The backstop for the penalty is the cost of securing coverage. If the cost of a bronze plan offered through the Obamacare marketplace is less than the IRS penalty calculation, then the taxpayer only has to pay a penalty equal to the cost of bronze plan coverage. The result, the administration hopes, is that the influx of new insurance consumers into the marketplace will lower overall premiums, and the cost of coverage will then be less than the income tax penalty – thus encouraging uninsured consumers to join a health plan.

The bottom line is that the ACA will affect the financial condition of nearly every American, whether privately insured, uninsured or covered under a sponsored plan. For more information on how the ACA will affect your taxes, contact 212 Tax at (646) 699-4818 or info@212tax.com.

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