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Changes to the Tax Laws Provide Relief For Those Without Healthcare

by
Steward Financial
on
1/28/2019
Changes to the Tax Laws Provide Relief For Those Without Healthcare

There is one aspect of the Affordable Care Act that has proven particularly unpopular: the penalty for not purchasing health insurance. Officially termed the “individual shared responsibility payment,” the penalty was meant to provide taxpayers with a gentle push to make sure that they signed up for insurance, as participation was considered essential for the program to work. Depending upon your point of view, it's either good news or bad news that the tax reform law passed at the end of 2017 eliminated the penalty, and that elimination will start in tax year 2019.

Though the original plan had been for even greater changes to the health insurance program, the tax reform act did not eliminate the program entirely. The health care subsidy (also known as the premium tax credit) is still in place and available through the Marketplace. Other elements of the law also remain, including penalties that employers of 50 or more full-time equivalent employees have to pay if they don't offer affordable insurance. The elimination of the penalty won't be felt until next year's tax time, as the penalty is still in place for those who didn't have minimum essential health coverage for 2018. That penalty is the equivalent of either 2.5% of the amount that a household's income exceeds the income-tax-filing threshold or the amount calculated based on published flat dollar amounts, whichever is greater.

If you did not purchase minimal essential health coverage for 2018, you need to do this calculation. For each adult in the household, the flat dollar amount is $695, or $57.92 for each month that coverage was not purchased. For each child in the household, the flat amount is $347.50, or $28.96 for each month that coverage was not purchased. There is a maximum flat dollar total of $2,085 per year, or $173.75. Whatever your calculation, it should be compared to the calculation of 2.5% of overage to determine which amount is applicable.

For a demonstration of how this works, consider a typical household with two children and two adults and a household income that is greater than the income-tax-filing threshold by $100,000. The calculation of the penalty for a full year without having purchased health insurance would be two x $695 for the two adults and two x $347.50 for the two children, for a total of $2,085. The 2.5% calculation would be $2,500, which would be the larger number and the amount that the family would be penalized. If the family had specific months where coverage was purchased, whether individually or all together, the number would be different as the calculation is done on a per month basis to allow for available exceptions, some of which are shown below. These may apply to the entire calendar year or to an individual month, and the calculation of exemptions can be complex as the monthly penalty relief gets applied to the months prior to and following the relief month.

* ECN standards for “exception certification number,” which must be applied for and provided through the government marketplace.

Beyond the specific exceptions listed above, there are also hardship exemptions available for those who can prove that they have been homeless, evicted or facing eviction due to foreclosure, have suffered the death of a family member or been affected by fire, flood or a disaster that caused substantial damage, or who filed for bankruptcy. Hardship exemptions are also available to those who have received utility company shut-off notices, who've incurred medical expenses that have resulted in substantial debt or increased expenses to care for an ill, disabled or aging family member, who claimed a child as a dependent who was denied either CHIP or Medicaid coverage, who were ineligible for Medicaid because their state didn't expand coverage. Finally, hardship exemptions are available if buying a qualified health plan would have led to deprivation of food, shelter and clothing, or other necessities or if the taxpayer experienced financial or domestic circumstances leading to an unexpected increase in essential expenses that made purchasing a qualified health plan out of reach.

Hardship exemptions are not automatic. In order to qualify the taxpayer must apply for an ECN, though self-certification is available for tax year 2018. Self-certifying may end up leading to an audit, so it's important that any taxpayer who chooses to take advantage of its availability keep all records in case they have to prove their qualifications to the IRS at a later date. As referenced for the exemption list shown above, for any month that a person qualifies for a hardship exemption the exemption extends to the individual month as well as the month before and after the event that led to the circumstances.

Calculating your penalty and determining whether you qualify for an exemption is not a straightforward process. For assistance, contact your tax professional and rely on them for guidance.

Jon Osborn, EA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].   

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Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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