The Affordable Care Act and Taxes: What You Need to Know

You may be hearing about healthcare reform more frequently these days with the passage of the Affordable Care Act (ACA), signed in March 2010 and upheld by a Supreme Court ruling in June 2012. But what is the Affordable Care Act, and what does it mean for you? Here’s an overview of what you need to know.

iStock_000021394059LargeWhat is healthcare reform?

The Affordable Care Act, or healthcare reform, was designed to extend cost-effective healthcare coverage to over 30 million uninsured Americans. This healthcare reform includes a new tax credit for almost 20 million low-income Americans, enabling those who are otherwise unable to afford health insurance the ability to purchase coverage.

Here are some of the important facts you should know about healthcare reform and how it impacts you and your family over the next three years:

  • 2012: The new requirement to purchase insurance has no change on your 2012 individual income tax return. However, your 2012 return will help determine your eligibility for a tax credit from the government, helping make health insurance more affordable under the Affordable Care Act.
  • 2013: Beginning in October 2013, uninsured Americans will have the ability to enroll in a health plan through state and federal exchanges.  There will be tax credits available from the government to help subsidize health insurance costs, available for those who purchase coverage from the new Health Insurance Exchanges and who have a household income up to 400% the federal poverty level (about $40,000 for an individual and about $89,000 for a family of four in 2011).  To be eligible for the Premium Tax Credits, individuals must not be covered under Medicaid, Medicare, and military and not have access to health insurance through their employer.   The requirement to purchase healthcare does not affect your 2013 tax return.
  • 2014: In 2014, everyone will be required to purchase health insurance.  People who don’t purchase health insurance will be subject to a penalty on their 2014 taxes.  There are some individuals who will not be required to purchase, including people with income below the IRS requirements for filing taxes, those who qualify for religious exemptions, and members of Indian tribes.
What does this mean for me and my taxes?

Starting in 2014, if you are required to purchase healthcare coverage at a health insurance Exchange, you may begin to see changes on your tax return.

If you are purchasing health insurance through a Health Insurance Exchange, you may be eligible for a tax credit, to help you cover the costs of health insurance. This is a new kind of tax credit that will be paid directly to your health insurance provider and help lower the costs of your payments or premiums. The tax credit amount you qualify is based off of your 2013 tax return and could be adjusted when you file your 2014 taxes.

If an employer provides your insurance, you may see that information reported on your 2012 W-2. If your W-2 includes this information, don’t worry.  This is for reporting purposes only and does not impact your taxes. Both Health Insurance Exchanges and employers will report information about health insurance coverage to the IRS, so you don’t have to worry as long as you are covered.

For those individuals required to purchase health insurance, but do not by  2014, a penalty will be collected via your tax return (minus the exceptions listed above). The penalty is pro-rated and will increase yearly:

  • $95 per person (up to $285 for a family) or 1% of your household income, whichever is greater in 2014
  • $325 per person (up to &975 for a family) or 2% of your household income, whichever is greater in 2015
  • $695 per person (up to $2085 for a family) or 2.5% of your household income, whichever is great in 2016

There is no penalty for a single gap in coverage of less than three months.