Tax Reform Removes the Affordable Care Act Penalty

Did you know tax reform eliminated the Affordable Care Act penalty or, more precisely, reduced the penalty to $0? Yes, that’s right. The removal of the penalty begins with the 2019 calendar year and affects 2019 tax returns filed in 2020.

Under the ACA, individuals who don’t have minimum essential health insurance coverage or qualify for an exemption were required to make a shared responsibility payment or penalty with their tax return.

If you don’t understand the magnitude of how many people are affected by this change, here are two figures to help you understand:

IRS data shows at least 4 million taxpayers paid the healthcare penalty in 2016, and around 5.6 million in 2015. So, millions of people are impacted by this provision in the new tax law.

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

• 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 may need to file  with their individual tax return.

The IRS receives information on health coverage from health care Marketplaces, health insurers and employers who send Form 1095-A, Form 1095-B, and Form 1095-C to both taxpayers and the IRS. These forms identify who was covered with health insurance and also let the IRS know if coverage lasted part of or a full year.

PRO TIP: Even though the individual penalty is eliminated beginning in tax year 2019, for tax returns filed in 2020, taxpayers will continue to receive Forms 1095-A, 1095-B, and 1095-C. Keep these forms with your tax information.

If you purchase health insurance through the Healthcare Marketplace, you will continue to use the information reported on Form 1095-A to calculate your premium tax credit. If you received an advance premium tax credit, you are required to reconcile information from Form 1095-A on your tax return. The premium tax credit and reconciliation are calculated on Premium Tax Credit.

More Tips On The Affordable Care Act and Tax Reform

As mentioned, tax reform eliminates the ACA penalty beginning in the tax year 2019. Because the TCJA makes other changes that interact with how the penalty is calculated, if you expect to pay a penalty in 2017 and 2018, then you should be aware of the other changes as you estimate your tax liability.

Here are three examples showing how the healthcare penalty calculation could vary or stay the same based on TCJA changes. Assume in each example that the taxpayer is not eligible for a penalty exemption.

Situation 1:

In 2017 and 2018, Laurie and Emmett file a tax return using the Married Filing Jointly (MFJ) filing status. They are 28 years old, don’t have any dependents, and are paying off student loans. Their combined wage income is $75,000. They have no other income. Laurie is a teacher and has continuous health insurance coverage, but Emmett doesn’t 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 is:

($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 is:

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

For both years, Laurie and Emmett would pay the amount calculated under the percentage-of-income calculation. The penalty is 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.

Situation 2:

Oliver is a single dad with two children. He files using the Head of Household tax filing status. He doesn’t have health insurance coverage, but the children are covered all year under the Children’s Health Insurance Program. His wage income was $38,000 in 2017 and 2018.

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

Percentage-of-income penalty in 2017:

($38,000 – $13,400) × 2.5% = $615

Percentage-of-income penalty in 2018:

($38,000 – $18,000) × 2.5% = $500

For both years, Oliver 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.

Situation 3:

Ashley is single and self-employed. She didn’t have any health insurance coverage throughout the year. Her adjusted gross income is $50,000 in 2017 and 2018.

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

Percentage-of-income penalty in 2017:

($50,000 – $10,400) × 2.5% = $990

Percentage-of-income penalty in 2018:

($50,000 – $12,000) × 2.5% = $950

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

Help Is At Your Fingertips

The Tax Cuts and Jobs Act includes hundreds of changes to the tax law, including the healthcare penalty.

For a customized tax strategy, get matched with an experienced tax advisor. Our tax advisors have specialized knowledge for your unique situation. Learn more about what to expect from Block Advisors.