Obamacare: Taxes, Penalties, and Credits
Will You Have to Pay Obamacare Taxes This Year?
The Patient Protection and Affordable Care Act (ACA) of 2010, known as Obamacare, imposed a lot of changes to the tax law. Here's a summary of the major taxes, penalties, fines, and tax credits. In 2019, the Tax Cuts and Jobs Act removed the penalty for not having insurance.
Penalty for Not Having Insurance
Up until 2019, you had to pay an additional tax (2.5% of your adjusted gross income) if you didn't have health insurance for at least nine months out of the year. The Trump tax plan, the Tax Cuts and Jobs Act, eliminated the tax.
The tax was capped at a maximum level, and it was never to be more than the average national cost of purchasing the Bronze health insurance plan on the exchanges. The Congressional Budget Office estimates this to be roughly $4,500 annually for individuals and $12,000 for families. The tax was also never to be less than a minimum flat tax of $695 per adult and $347.50 per child, capped at $2,085 per family. After 2016, this minimum rises with the Consumer Price Index.
In 2015, 6.5 million tax filers paid the penalty, but this number declined with each year. Those who earn $25,000–$50,000 were the most likely to pay the penalty, most of whom stated they couldn't afford insurance. Those who earned less than $25,000 could usually take advantage of Medicaid.
Tax Benefits Reduced
If you itemize, you can only deduct the medical expenses that aren't covered by your health insurance and exceed 10% of your income. The ACA increased the adjusted gross income threshold for claiming the itemized deduction for medical expenses to 10% from 7.5% beginning after 2012. Before 2012, you could deduct only the amount of your medical expenses that was more than 7.5% of your adjusted gross income. Trump's tax plan reduced the deduction back to 7.5% from 10%. The 7.5% threshold remains in place until the end of 2020.
If you use a Health Savings Account (HSA) or a similar account, you will be able to contribute up to $3,550 ($7,100 for families) to the account beginning in 2020. The ACA excluded over-the-counter drugs as eligible flexible spending account medical expenses. If you don't use FSA funds for medical expenses, the tax penalty increases to 20%.
Income Tax Raised
If you make more than $200,000 a year, file jointly as a married couple earning at least $250,000, or married but filing separately and earn at least $125,000 yearly, you will pay extra income taxes. That's an additional 0.9% Medicare hospital tax on your income and self-employment profits above the stated thresholds, as well as an extra 3.8% on investment income. These include dividends and capital gains that are above the threshold.
If your income is above the threshold, you may also pay Obamacare taxes if you sell your home. The taxes apply if you make more than $250,000 as a single person or $500,000 as a married couple in capital gains. That means you've got to clear the applicable threshold amount after deducting the original purchase price and other investments that you've made. If you're selling investment property, you don't receive this exclusion; Obamacare tax treats it like any other capital gain.
- Cadillac Tax: Companies that offer high-cost health insurance plans, called Cadillac plans, will be levied a 40% excise tax. These plans have premiums of at least $10,200 for individuals or $27,500 for families, and those in dangerous jobs need them. Lobbyists worked to repeal the tax in 2018 because that's when businesses would begin planning for 2020. It's been since delayed until 2022.
- Indoor Tanning Services: This is an excise tax of 10% of the actual cost of tanning
- Medical Device Manufacturers: These companies pay a 2.3% excise tax on gross sales. This tax was suspended until 2018, and the medical device trade association, AdvaMed, is lobbying to repeal the tax.
- Prescription Drug Makers and Importers: These businesses are levied an annual fee.
- Corporations: In 2014, the estimated tax payments factor increased by 15.75% for corporations with assets of at least $1 billion.
- Health Insurance Companies: The ACA imposes a $500,000 annual deduction limit on compensation paid by covered health insurance providers to applicable individuals.
Tax Credits and Exemptions
If your income is 400% or less of the federal poverty level, you may qualify for a tax credit, which varies by state. If your income is between 100% and 400% of the federal poverty level, you qualify for premium tax credits that lower your monthly premium for a Marketplace health insurance plan. If your income was 138% or less of the poverty level, you didn't have to pay the tax, and in most states, you would also be eligible for Medicaid.
You also didn't have to pay the tax if your income was so low that coverage is unaffordable, you aren't required to file a tax return, you're a member of an Indian tribe, you participate in a health care sharing ministry, or you apply for a hardship exemption.
Companies with less than 25 employees may qualify for a 50% tax credit for health insurance. They are eligible if the average wage of the employees is less than $50,000, and they pay at least half of the premiums. That doesn't apply to the health insurance costs of owners.
With less than 50 employees, you can use the health insurance exchanges to help you find the cheapest plans. With 50 or more employees, you must pay an excise tax of $2,000 per employee if you don't provide health insurance. An exception applies for the first 30 employees.
All businesses can get federal financial assistance if they offer health insurance to early retirees from 55–64 years old, and they can also get a tax credit of 28% of drug costs if they provide prescription coverage for retired employees.
Tax-exempt employers can get a 35% tax credit as a refund under the same conditions as small businesses above.
HealthCare.gov. "No Health Insurance? See If You'll Owe a Fee." Accessed Jan. 6, 2020.
HealthCare.gov. "Exemptions From the Requirement to Have Health Insurance." Accessed Jan. 6, 2020.
Congressional Budget Office. "Estimated Premiums for 'Bronze' Coverage Under the Patient Protection and Affordable." Page 2. Accessed Jan. 6, 2020.
IRS. "Individual Shared Responsibility Provision – Reporting and Calculating the Payment." Accessed Jan. 6, 2020.
Congressional Budget Office. "Estimating the Costs of Proposals Affecting Health Insurance Coverage," Page 7. Accessed Jan. 6, 2020.
IRS. "IRS Commissioner Letter ACA Filing Season," Page 5. Accessed Jan. 6, 2020.
IRS. "Topic No. 502 Medical and Dental Expenses." Accessed Jan. 6, 2020.
Congress.gov. "H.R.3590 - Patient Protection and Affordable Care Act." Accessed Jan. 6, 2020.
BillTrack50. "US-HR1, Tax Cuts and Jobs Act." Accessed Jan. 6, 2020.
Tax Policy Center. "How Did the TCJA Change the Standard Deduction and Itemized Deductions?" Accessed Jan. 14, 2020.
HealthCare.gov. "Finding & Using HSA-Eligible HDHPs." Accessed Jan. 6, 2020.
IRS. "Affordable Care Act: Questions and Answers on Over-the-Counter Medicines and Drugs." Accessed Jan. 6, 2020.
IRS. "What Is the Additional Medicare Tax?" Accessed Jan. 6, 2020.
IRS.gov. "Questions and Answers on the Net Investment Income Tax." Accessed Jan. 6, 2020.
HealthCare.gov. "What to Include as Income." Accessed Jan. 6, 2020.
IRS. "Questions and Answers on the Net Investment Income Tax." Accessed Jan. 6, 2020.
IRS. "Excise Tax on High Cost Employer-Sponsored Health Coverage," Pages 2-3. Accessed Jan. 6, 2020.
IRS. "Indoor Tanning Services Tax Center." Accessed Jan. 6, 2020.
IRS. "Medical Device Excise Tax: Frequently Asked Questions." Accessed Jan. 6, 2020.
AdvaMed. "Medical Device Tax." Accessed Jan. 6, 2020.
IRS. "Annual Fee on Branded Prescription Drug Manufacturers and Importers." Accessed Jan. 6, 2020.
Westlaw. "Section 162(m)(6): Limit on Deduction for Compensation Paid by Health Insurers Under the ACA." Accessed Jan. 5, 2020.
HealthCare.gov. "Federal Poverty Level (FPL)." Accessed Jan. 6, 2020.
Healthcare.gov. "Federal Poverty Level (FPL)." Accessed Jan. 6, 2020.
Healthcare.gov. "Health Coverage Exemptions, Forms & How to Apply." Accessed Jan. 6, 2020.
HealthCare.gov. "The Small Business Health Care Tax Credit." Accessed Jan. 6, 2020.
IRS. "Employer Shared Responsibility Provisions." Accessed Jan. 6, 2020.
Centers for Medicare and Medicaid. "Early Retirees and the Affordable Care Act." Accessed Jan. 6, 2020.
IRS. "Small Business Health Care Tax Credit and the SHOP Marketplace." Accessed Jan. 6, 2020.