- Individual health insurance mandate
- Penalty for not being insured
- Premium assistance credit
- Insurance premium subsidies
- Repayment of excessive subsidies
The Affordable Care Act (ACA), also referred to as Obamacare, imposes an individual mandate requiring all non-exempt U.S. Citizens and legal residents to enroll in government-approved health insurance in 2014 or pay a penalty. The penalty will be collected through the individual’s income tax returns (Form 1040).
The penalty for not having insurance is generally the greater of $95 per adult ($47.50 per child) or 1% of the family’s household income. However, because the penalty is small in comparison to the cost of health insurance, it is estimated that between 8 and 12 million people will opt to pay the penalty rather than buy insurance.
That number would be higher was it not for the fact that undocumented immigrants and very low-income households that are not required to file a tax return are exempt from the insurance mandate. An analysis by the Congressional Budget Office (CBO) estimates that about two-thirds of the uninsured population will be exempt from the mandate.
Families with incomes between 100% and 400% of the Federal poverty level, whom are not covered by a government-approved plan with their employer and purchase their insurance through a state or federal insurance Marketplace, will receive financial aid to help pay for the cost of the insurance.
The financial aid comes in the form of a refundable tax credit called the premium assistance credit. The amount of the credit is based on the family’s income for 2014; the lower the income, the greater the credit. For those at the lower end of the poverty level scale, the credit will cover a substantial portion of the cost of the insurance.
The credit can be taken in advance, based upon an estimated income for 2014, in the form of a subsidy to reduce the monthly insurance premiums. However, basing the advance subsidy on estimated income for the year creates a potential tax liability since the credit is based on the year’s actual income, and if the estimated income provides a subsidy in excess of the credit, the excess may have to be paid back when the 2014 tax return is filed. Of course, if the subsidy taken during the year was less than the actual credit, the difference is refunded on the tax return.
Those who substantially underestimated their income when signing up for healthcare insurance through one of the Marketplaces and took the advance subsidy may find themselves with a large unexpected tax liability.