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, Americans had to pay an additional tax (2.5% of adjusted gross income) if they 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 (CBO) 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 rose 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 to $50,000 were the most likely to pay the penalty, most of whom stated that they couldn't afford insurance. Those who earned less than $25,000 could usually take advantage of Medicaid.
Tax Benefits Reduced
Taxpayers who itemize can only deduct the medical expenses that aren't covered by health insurance and exceed 7.5% of their income. The ACA increased the adjusted gross income (AGI) threshold for claiming the itemized deduction for medical expenses to 10% from 7.5% beginning after 2012.
Before 2012, one could deduct only the amount of medical expenses that was more than 7.5% of their adjusted gross income. Trump's tax plan reduced the deduction back to 7.5% from 10%. The 7.5% threshold remains in place in 2021.
Those who use a Health Savings Account (HSA) or a similar account will be able to contribute up to $3,600 ($7,200 for families) to the account beginning in 2021.
The ACA excluded over-the-counter drugs as eligible flexible spending account (FSA) medical expenses. If FSA funds aren't used for medical expenses, the tax penalty increases to 20%.
Income Tax Raised
Those who earn more than $200,000 a year, file jointly as a married couple earning at least $250,000, or are married but file separately and earn at least $125,000 yearly, will pay extra income taxes.
That's an additional 0.9% Medicare hospital tax on income and self-employment profits above the stated thresholds, as well as an added 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 an investment property or a vacation home, you don't receive this exclusion. The tax code treats it like any other capital gain.
- Indoor Tanning Services: This is an excise tax of 10% of the actual cost of tanning.
- 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.
Some taxes were initially applied to businesses but have since been fully repealed. These include the:
- "Cadillac Tax": Companies that offer high-cost "Cadillac" health insurance plans, with annual premiums of at least $10,200 for individuals or $27,500 for families, were assessed a 40% excise tax. The 2020 appropriations bill fully repealed the tax.
- Medical Device Manufacturers: These companies used to pay a 2.3% excise tax on gross sales. The 2020 appropriations bill fully repealed the tax.
Tax Credits and Exemptions
If your income is 400% of the federal poverty level or less, 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.
In 2021, the American Rescue Plan temporarily allowed all households that purchase insurance through the Marketplace to qualify for subsidized health insurance, even if their income exceeds 400% of the federal poverty level. In 2021 and 2022, you may be eligible for subsidies that lower the cost of your Marketplace health insurance, even if your income was too high to qualify in previous years.
Before it was repealed, those with incomes equal to 138% or less of the poverty level did not have to pay the tax penalty for not having insurance. In most states, this level of income also means you were and are eligible for Medicaid.
The tax also didn't apply to taxpayers who:
- Had an income so low that coverage was unaffordable.
- Weren't required to file a tax return.
- Are Indigenous American.
- Participated in a health care sharing ministry.
- Applied for a hardship exemption.
Companies with fewer 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 fewer than 50 employees, you can use the health insurance exchanges to help you find the lowest-cost 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 to the first 30 employees.
All businesses can get federal financial assistance if they offer health insurance to early retirees ages 55 through 64, 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, described above.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to them. For current tax or legal advice, please consult with an accountant or an attorney.