Latest Tax Reform Removes the Affordable Care Act Penalty

October 10, 2018 : Gil Charney

Editor’s Note: This article was originally published on January 23, 2018. 

 

You may have heard that tax reform eliminated the Affordable Care Act (ACA) individual penalty, but it’s important to note that the removal of the so-called healthcare tax penalty starts with 2019 tax returns filed in 2020. Here are some details about the ACA penalty and how it is affected by the Tax Cuts and Jobs Act (TCJA) below.

Under the Affordable Care Act, 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 healthcare penalty for tax year 2016, and at least 5.6 million paid the penalty for tax year 2015.

How Is the Healthcare Penalty Calculated?

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 on Schedule 4 of Form 1040. 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. These groups send Form 1095-AForm 1095-B, and Form 1095-C to taxpayers and the IRS. These forms show who 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.

What’s Important to Note About the Affordable Care Act and Tax Reform?

As mentioned, tax reform 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. To get an estimate of how your taxes may be affected, visit our tax refund and tax reform calculator.

Here are three examples showing how the healthcare penalty calculation could differ (or stay about the same) based on changes made by the TCJA. Assume in each example that the taxpayer is not eligible for a penalty exemption. Want to know how the tax reform changes to the Affordable Care Act penalty could impact you? Make an appointment with one of our knowledgeable Tax Pros.

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.

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.

Need Help Understanding How the Healthcare Penalty and Tax Reform Affect You?

The Tax Cuts and Jobs Act includes hundreds of changes, including the change to the healthcare penalty. You can learn more about how these changes could impact you in our Tax Reform Center. If you’re looking for personal assistance, schedule an appointment with your nearest H&R Block tax professional.

 

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Gil Charney

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