Tax Exemptions and the Affordable Care Act

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:

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  • 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.

Financial and Religious Exemptions From the Individual Mandate Penalty

The individual mandate penalty, also known as the "individual shared responsibility payment," is collected as a tax. Congress has authorized the IRS to allow taxpayers to claim an exemption from the penalty for financial or religious reasons, and also for a number of personal reasons known as hardship exemptions.

Let's start with the financial exemptions. The first and surely the most common exemption from the individual mandate provision is extended to anyone who doesn't make enough money to file a federal income tax return. The minimum filing threshold in 2014 for a single filer under 65 is $10,150 and twice that amount for a married couple filing jointly. The thresholds are slightly higher for people over 65 [source: IRS]. If you don't have to file a tax return, you don't have to pay the penalty.

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The second financial exemption is for taxpayers who can't find an affordable health insurance plan. If you shopped for a health care plan on the online marketplace, but the cheapest plan in your area cost more that 8 percent of your household income, you are exempt from paying the penalty if you choose not to buy insurance [source: Healthcare.gov].

Affiliation with certain ethnic and religious groups can also gain you an exemption from the individual mandate penalty [source: Healthcare.gov, Alliance of Health Care Sharing Ministries]:

  • Members of federally recognized Native American tribes are exempt if they receive medical care through an Indian Health Services provider.
  • Members of a recognized health care sharing ministry are also exempt. These religious organizations pool the resources of members and distribute funds to cover one another's medical expenses.
  • Members of religious sects with long-held objections to insurance and/or medical care are exempt.

Finally, there are exemptions for people who were uninsured for part of the year, but not more than three months. The IRS allows a grace period for people who experience a small gap in coverage for a variety of reasons.

All of these exemptions can be claimed on the new Form 8965, which must be filed along with the 1040 tax return in 2015. Some of the exemptions -- including the provisions for members of certain religious groups and tribes -- can be claimed directly in the health care online marketplace. For further clarification, read the full instructions for applying for an exemption.

Next, we'll explore an entirely separate category of ACA exemptions called hardship exemptions.

Hardship Exemptions From the Individual Mandate Penalty

Angel Rivera (L) and his wife Wilma Rivera sit with Amada Cantera, an insurance agent with Sunshine Life and Health Advisors as they try to purchase health insurance under the Affordable Care Act in Miami.
Angel Rivera (L) and his wife Wilma Rivera sit with Amada Cantera, an insurance agent with Sunshine Life and Health Advisors as they try to purchase health insurance under the Affordable Care Act in Miami.
Joe Raedle/Getty Images

Even the bureaucrats in Washington recognize that there are certain life situations in which it's difficult to buy health insurance. The Affordable Care Act (ACA) contains a long list of temporary exemptions to the individual mandate provision for people who have suffered serious hardships.

Qualifying hardships include [source: Healthcare.gov]:

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  • Homelessness
  • Eviction, foreclosure or bankruptcy in the past six months
  • Domestic violence
  • Death or life-threatening illness of a close family member
  • Fire, flood or other natural disaster
  • Overwhelming medical expenses for yourself or a family member
  • A shutoff notice from a utility

Count yourself lucky if you don't qualify for any of those exemptions. The ACA also includes exemptions for people who fall between the cracks of the health care law as it's rolled out in individual states. For example, 23 states have not accepted federal funds to expand their Medicaid coverage to more low-income adults [source: Kaiser Family Foundation]. If you live in one of those states and would have been eligible for coverage under the rules of the expansion, you are exempt from paying the penalty [source: Healthcare.gov].

Other taxpayers tried to sign up for a plan using the online marketplace but were denied tax credits to help cover the costs. Through an appeals process, they eventually won approval for the credits. The ACA exempts such individuals from the penalty during the months they were uninsured and appealing their eligibility [source: Healthcare.gov].

A final category of exempt individuals had their catastrophic coverage plans cancelled by their provider and can't find an affordable substitute on the online marketplace. Catastrophic coverage plans have low monthly deductibles and serve to protect the insured from only the highest health care costs. If you qualify for this hardship exemption, you are excused from paying the penalty and you are given access to the lowest rate catastrophic plans in the marketplace [source: Healthcare.gov].

To claim any of these hardship exemptions, taxpayers need to complete and mail in a paper application to the health insurance marketplace. Some hardship exemptions require support documentation like a bankruptcy filing, a death notice, or a copy of a police or fire report. This claim should be done sooner rather than later because the taxpayer needs to receive an exemption certificate number from the marketplace to include with his or her federal tax filing.

For lots more information about the Affordable Care Act and other little understood changes to U.S. tax law, check out the related HowStuffWorks links on the next page.

Author's Note: Tax Exemptions and the Affordable Care Act

Being a freelance writer has many perks, chief among them flexibility. I'm my own boss, so I can make my own hours, and the commute -- 13 steps from my bedroom -- is usually stress-free. But with all of that flexibility comes some costs, including the lack of an employer-sponsored health care plan. When the Affordable Care Act passed, I was excited at the possibility that I would have access to better private health insurance coverage at a lower monthly rate. Unfortunately, me and my family fell smack in the sweet spot (sour spot, more accurately) where we made just enough money not to qualify for tax credits to help pay for coverage. The result was a new plan with slightly worse coverage than my old one and for a slightly larger monthly fee. I'm glad that millions of uninsured Americans now have coverage under the ACA, but I'm bummed that my personal ACA story didn't have a happier ending.

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Sources

  • Alliance of Health Care Sharing Ministries. "What is a Health Care Sharing Ministry?" (Nov. 12, 2014) http://www.healthcaresharing.org/hcsm/
  • Healthcare.gov. "Catastrophic Health Insurance Plans" (Nov. 12, 2014) https://www.healthcare.gov/choose-a-plan/catastrophic-plans/
  • Healthcare.gov. "Exemptions from the fee for having health coverage" (Nov. 12, 2014) https://www.healthcare.gov/fees-exemptions/exemptions-from-the-fee/
  • Healthcare.gov. "The fee you pay if you don't have health coverage" (Nov. 12, 2014) https://www.healthcare.gov/fees-exemptions/fee-for-not-being-covered/
  • Healthcare.gov. "Hardship exemptions from the fee for not having health coverage" (Nov. 12, 2014) https://www.healthcare.gov/fees-exemptions/hardship-exemptions/
  • IRS. "Draft 1040 Instructions 2014" (Nov. 12, 2014) http://www.irs.gov/pub/irs-dft/i1040gi--dft.pdf
  • IRS. "The Individual Shared Responsibility Provision" (Nov. 12, 2014) http://www.irs.gov/uac/Individual-Shared-Responsibility-Provision
  • IRS. "Individual Shared Responsibility Provision -- Calculating the Payment" (Nov. 12, 2014) http://www.irs.gov/uac/ACA-Individual-Shared-Responsibility-Provision-Calculating-the-Payment
  • Kaiser Family Foundation. "State Decisions on Health Insurance Marketplace and Medicaid Expansion." Aug. 28, 2014 (Nov. 12, 2014) http://kff.org/health-reform/state-indicator/state-decisions-for-creating-health-insurance-exchanges-and-expanding-medicaid/
  • Supreme Court of the United States. "National Federation of Independent Business et al. v. Sebelius, Secretary of Health and Human Services, et al." June 28, 2012 (Nov. 12, 2014) http://www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf