Latest Tax Reform Removes the Affordable Care Act Penalty | H&R Block

January 23, 2018 : Gil Charney

Editor’s Note: The new tax law eliminated the Affordable Care Act (ACA) penalty, beginning with 2019 tax returns filed in 2020.

 

Under the Affordable Care Act (ACA), taxpayers who do not have minimum essential health insurance coverage or qualify for an exemption were required to pay a penalty on their tax return. IRS data shows at least 4 million taxpayers paid the penalty for tax year 2016, and at least 5.6 million paid the penalty for tax year 2015.

For tax years 2016, 2017, and 2018, the healthcare tax penalty is the greater of $695 per individual (up to a maximum of $2,085) or 2.5% of household income, less the taxpayer’s filing threshold amount. The healthcare penalty is calculated using a worksheet and entered directly on Form 1040, 1040A, or 1040EZ. See “Reporting and Calculating the Payment” for more information.

Taxpayers who are eligible to claim a penalty exemption file Form 8965 with their tax return.

The IRS receives information about health coverage from health insurers and employers. They send Form 1095-A, Form 1095-B, and Form 1095-C to taxpayers and the IRS. These forms show whom was covered and also let the IRS know if coverage lasted all year or part of the year.

Tip: Even though the individual penalty is eliminated beginning with tax year 2019 returns filed in 2020, taxpayers will continue to receive Forms 1095-A, 1095-B, and 1095-C with information about their coverage. Taxpayers should keep these forms with their tax returns. Taxpayers who purchased coverage through the Marketplace will continue to use information reported on Form 1095-A to calculate the premium tax credit; taxpayers who received an advance premium tax credit are required to reconcile information from Form 1095-A on their tax returns.

The Tax Cuts and Jobs Act of 2017 (TCJA) eliminates the Affordable Care Act penalty beginning in tax year 2019. Because the TCJA makes other changes that interact with how the ACA penalty is calculated, taxpayers who expect to pay a penalty in 2017 and 2018 should be aware of the other changes as they estimate their tax liability.

Here are three examples showing how the ACA penalty calculation could differ (or stay about the same) based on changes made by the TCJA. Make an appointment with a tax professional to find out how the changes could impact you.


Scenario 1

In 2017 and 2018, Liam and Emma file a tax return using the married filing jointly filing status. They are 30 years old, do not have any dependents, and are paying off student loans. Their combined wage income is $75,000. They have no other income. Emma is a teacher and has continuous health insurance coverage, but Liam does not have coverage.

In 2017 and 2018, their flat-dollar healthcare penalty would be $695.

Their percentage-of-income penalty would be different each year.

In 2017, their AGI is $72,250 ($75,000 – $2,500 student loan interest deduction – $250 educator expense deduction).  The percentage-of-income penalty would be:

($72,250 – $20,800) × 2.5% = $1,286.25

In 2018, their AGI is $72,250 ($75,000 – $2,500 student loan interest deduction – $250 educator expense deduction). Their percentage-of-income penalty would be:

($72,250 – $24,000) × 2.5% = $1,206.25

For both years, Liam and Emma would pay the amount calculated under the percentage-of-income calculation. The penalty is similar for both years, but slightly lower in 2018 because of the increased standard deduction under the TCJA, which is more than the pre-TCJA standard deduction and personal exemptions combined.


Scenario 2

Olivia is a single mom with two children, filing using the head of household filing status. She does not have any health insurance coverage, but the children were covered all year under the Children’s Health Insurance Program. Her wage income was $38,000 in 2017 and 2018.

In 2017 and 2018, Olivia’s flat-dollar healthcare tax penalty would be $695.

Her percentage-of-income penalty for 2017 would be:

($38,000 – $13,400) × 2.5% = $615

Her percentage-of-income penalty for 2018 would be:

($38,000 – $18,000) × 2.5% = $500

For both years, Olivia would pay the flat-dollar penalty of $695, because, in both years, the flat-dollar method results in a higher penalty than the percentage-of-income method.

Note: Also for both years, Olivia may qualify for a premium tax credit if she purchased insurance through a Marketplace.


Scenario 3

Asher is single and self-employed. He did not have any health insurance coverage during the year. His adjusted gross income is $50,000 in 2017 and 2018.

In 2017 and 2018, Asher’s flat-dollar healthcare penalty would be $695.

His percentage-of-income penalty for 2017 would be:

($50,000 – $10,400) × 2.5% = $990

His percentage-of-income penalty for 2018 would be:

($50,000 – $12,000) × 2.5% = $950

Asher will pay the percentage of income penalty in 2017 and 2018. Because the increased standard deduction under TCJA is slightly more than the pre-TCJA standard deduction and personal exemption, he saves about $40 on the health insurance penalty for 2018.

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Gil Charney

Gil is the Director of Tax Law and Policy Analysis for The Tax Institute at H&R Block.