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.
You may also pay Obamacare taxes if you sell your home for a profit. People who sell their main home that they've owned and lived in for at least five years can exclude up to $250,000 of gain ($500,000 if married filing a joint return). You calculate the gain by subtracting the original purchase price and the cost of other improvements from the selling price. Any gain over those thresholds is considered a capital gain, subject to the net investment income tax. If you're selling investment property or a vacation home, you don't receive this exclusion. The tax code 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. 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 July 21, 2020.
HealthCare.gov. "Exemptions From the Requirement to Have Health Insurance." Accessed July 21, 2020.
Congressional Budget Office. "Estimated Premiums for 'Bronze' Coverage Under the Patient Protection and Affordable." Page 2. Accessed July 21, 2020.
IRS. "Individual Shared Responsibility Provision – Reporting and Calculating the Payment." Accessed July 21, 2020.
Congressional Budget Office. "Estimating the Costs of Proposals Affecting Health Insurance Coverage," Page 7. Accessed July 21, 2020.
IRS. "IRS Commissioner Letter ACA Filing Season," Page 5. Accessed July 21, 2020.
IRS. "Topic No. 502 Medical and Dental Expenses." Accessed July 21, 2020.
Congress.gov. "H.R.3590 - Patient Protection and Affordable Care Act." Accessed July 21, 2020.
BillTrack50. "US-HR1, Tax Cuts and Jobs Act." Accessed July 21, 2020.
Tax Policy Center. "How Did the TCJA Change the Standard Deduction and Itemized Deductions?" Accessed July 21, 2020.
HealthCare.gov. "Finding & Using HSA-Eligible HDHPs." Accessed July 21, 2020.
IRS. "Affordable Care Act: Questions and Answers on Over-the-Counter Medicines and Drugs." Accessed July 21, 2020.
IRS. "What Is the Additional Medicare Tax?" Accessed July 21, 2020.
IRS. "Questions and Answers on the Net Investment Income Tax." Accessed July 21, 2020.
HealthCare.gov. "What to Include as Income." Accessed July 21, 2020.
IRS. "Questions and Answers on the Net Investment Income Tax." Accessed July 21, 2020.
IRS. "Excise Tax on High Cost Employer-Sponsored Health Coverage," Pages 2-3. Accessed July 21, 2020.
IRS. "Indoor Tanning Services Tax Center." Accessed July 21, 2020.
IRS. "Medical Device Excise Tax: Frequently Asked Questions." Accessed July 21, 2020.
AdvaMed. "Medical Device Tax." Accessed July 21, 2020.
IRS. "Annual Fee on Branded Prescription Drug Manufacturers and Importers." Accessed July 21, 2020.
New York State Department of Taxation and Finance, Office of Tax Policy Analysis. "Summary of Tax Provisions in SFY 2014-2015 Budget." Accessed July 21, 2020.
Westlaw. "Section 162(m)(6): Limit on Deduction for Compensation Paid by Health Insurers Under the ACA." Accessed July 21, 2020.
HealthCare.gov. "Federal Poverty Level (FPL)." Accessed July 21, 2020.
Healthcare.gov. "Federal Poverty Level (FPL)." Accessed July 21, 2020.
Healthcare.gov. "Health Coverage Exemptions, Forms & How to Apply." Accessed July 21, 2020.
HealthCare.gov. "The Small Business Health Care Tax Credit." Accessed July 21, 2020.
IRS. "Employer Shared Responsibility Provisions." Accessed July 21, 2020.
Centers for Medicare and Medicaid. "Early Retirees and the Affordable Care Act." Accessed July 21, 2020.
IRS. "Small Business Health Care Tax Credit and the SHOP Marketplace." Accessed July 21, 2020.