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Tax Exemptions and the Affordable Care Act

        Money | Taxes

Felue Chang who is newly insured under an insurance plan through the Affordable Care Act receives a checkup from Dr. Peria Del Pino-White at the South Broward Community Health Services clinic in Hollywood, Florida in 2014.
Felue Chang who is newly insured under an insurance plan through the Affordable Care Act receives a checkup from Dr. Peria Del Pino-White at the South Broward Community Health Services clinic in Hollywood, Florida in 2014.
Joe Raedle/Getty Images

The Affordable Care Act (ACA) relies on the IRS to enforce the individual mandate provision of the health care law. According to the IRS, the individual mandate requires that every taxpayer and every member of the taxpayer's family meet one of the following criteria:

  • Have "minimal essential coverage," either through an employer, a private health insurance plan, or other government-sponsored coverage through Medicare, Medicaid, the Department of Veterans Affairs, etc.; or
  • Pay the penalty for not having health insurance when filing a federal income tax return; or
  • Apply for and receive an exemption from the individual mandate provision.

The federal income tax forms for tax year 2014 (filed in 2015) will be the first to include questions related to the individual mandate. According to drafts of the 2014 federal income tax form 1040, the updated tax return will include three new lines:

  • Line 46, for taxpayers who must pay back a portion of the premium tax credit received in advance to help pay for marketplace insurance (income was more than the reported estimate when applying for insurance).
  • Line 61, in which taxpayers indicate whether or not they had health care coverage during the full tax year. If not, the taxpayer can either claim an exemption (by attaching Form 8965) or make the "shared responsibility payment," i.e., the individual mandate penalty.
  • Line 69, for taxpayers who will receive a larger premium tax credit than what was received during the year (income was less than the reported estimate when applying for insurance or you elected to receive less or no advanced premium tax credit).

How much exactly is the penalty for not having minimum health insurance coverage? For the 2014 tax year, the penalty equals the greater of these two figures [source: IRS]:

  • 1 percent of your household income that is above your filing threshold; or
  • $95 per adult in your family, plus $47.50 per child up to a maximum payment of $285

Let's hash that out. The filing threshold is the minimum amount of money you can make and still be required to file a tax return. For a married couple filing jointly (both under 65 years old), the minimum filing threshold in 2014 is $20,300 [source: IRS]. If a couple's household income is $50,000, then the penalty would equal 1 percent of $29,700 ($50,000 - $20,300), or $297. If the couple has two dependent children, the total penalty using the flat rate method would be $285. In this case, the 1 percent calculation is greater, so their penalty would be $297.

The penalty is scheduled to -- gulp -- increase with each tax year [source: Healthcare.gov]:

  • In 2015, the penalty will equal the greater of 2 percent of household income or $325 per adult and $162.50 per child under 18, with a maximum penalty of $975 per family.
  • In 2016, the penalty increases to 2.5 percent of income or $695 per person.
  • After 2016, the rate will be adjusted for inflation.

Next we'll look at the accepted "exemptions" for not paying the individual mandate penalty.


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