How the Affordable Care Act (ACA) Will Affect the Average Joe at Tax Time
The Hudson Valley Tax Pros
Here it comes, that dark and ominous cloud inching ever closer each day – tax season. Just when we thought taxes couldn’t get any more complicated, the Affordable Care Act (ACA) comes along and makes some pretty big changes that will impact millions of Americans. The ACA literally made 46 changes to this year’s tax code – changes that mostly affect the uninsured and those who received a tax credit or subsidy. Obviously, you likely don’t have the time or interest to become an ACA expert – but you also don’t want to be put through the ringer come tax time.
So the Hudson Valley Tax Pros took the liberty to debunk some common misconceptions about the ACA, and have pointed out the traps that will ensnare many a taxpayer this season. And in an effort to keep things exciting, let’s do some role-playing and learn from the average Joe’s mistakes.
Average Joe says: “Look, I was short on cash last year, and so I decided to go without insurance. The worst that could happen is the IRS slaps me with a $95 fine. No biggie, I’ll pay it and move on.”
The IRS might say: “Not so Joe. Contrary to popular belief, the fine isn’t necessarily a one-time penalty of $95. Rather, the payment you’ll be responsible for is whichever is higher: 1% of your household income, or $95 per uninsured adult. More often than not, 1% of household income exceeds $95. Also keep in mind that you will be responsible for any uninsured children ($47.50 per child) up to a maximum of $285 per family. Do the math, Joe. Do the math.”
Average Joe says: “Ok, well actually I remember that I had short-term major medical coverage for 6 months last year. Then I traveled to Djibouti and was covered by traveler’s insurance for the remainder of the year. I always had health insurance of some kind, so I’ll be just fine.”
The IRS might say: “Not so Joe. Unfortunately, neither of those insurance plans meets the ACA requirement. Here is a list of ACA accepted policies:
•Insurance through an accredited college or university
•Your parent’s ACA accepted insurance
•Public health groups such as Medicaid, Medicare, Children’s Health Insurance Program (CHIP), and military or veteran’s affairs (TRICARE included)
•Peace Corps volunteer insurance plans
•Your employer’s insurance (including COBRA)
Average Joe says: “Last year, my whole family was covered by my employer’s health insurance, everyone except my youngest daughter. I just won’t claim her as a dependent and avoid the penalty.”
The IRS might say: “Not so Joe. We have our eye on that type of thing. You should go on and claim her, or simply pay the $47.50 penalty.”
Average Joe says: “Ok, what if I bought my insurance policy in the federal marketplace and received a tax credit (subsidy) to help with my monthly premiums. Because of this, I won’t owe any money and everything will be swell, right?”
The IRS might say: “Not so Joe. If you received the correctly sized tax credit, based on your estimated income, then you’ll be just fine. However, if your income was more than you estimated, you will likely owe money because the tax credit was too big for your needs. If your income was less than estimated, you will likely get a bigger refund. In either case, you must reconcile these tax credits when you file. Joe, listen up, this part can get tricky, it’s best you see a certified tax preparer if you have any concern at all.”
Nearly 7 million people received subsidies last year. It’s estimated that about half of these people will either receive a smaller refund or have to cough up some money to the government. Unfortunately, this will come as an unwelcome surprise to many unprepared taxpayers in mid-April.
But it’s not all bad news. One of the silver-linings of the ACA is the all-mighty exemption. There are a number of exemptions – 33 to be exact – that give immunity to those not carrying health insurance and the penalties associated with not having insurance. Exemptions range from having been incarcerated to religious affiliation to general hardship. Refer to the complete list of ACA exemptions and the steps it takes to get an exemption if you think you might qualify. (*Note: An exemption doesn’t preclude you from having to pay back money to the IRS for over subsidization).
To cover your bases, it’s recommended you see an expert tax-preparer if you have any questions or concerns. The coming tax-season is already slated to be the most confusing and “miserable” tax season in decades – so don’t allow the ACA changes to throw you even further into confusion and misery. The more prepared you become now, as it’s still early in the game, the better off you’ll be.
Now that you’re well-learned in the Affordable Care Act, you hopefully have a better idea of where you stand. Even still, consider reaching out to the Hudson Valley Tax Pros to get help with your individual taxes. And let us know how you intend to navigate the ACA changes this year in the comments below.