How to dodge the Obamacare tax penalty — legally
It’s that joyous time of year when W-2s, 1099s and the other forms we need for our taxes start landing in our mailboxes.
A new form debuts this year. It’s called the 1095-A and goes to people who purchased health insurance through Covered California (and other health insurance exchanges around the country).
The 1095-A is just the beginning. Obamacare made some big changes to the tax system, and as a result, filing income taxes will be more complicated for some people.
Q: There’s supposedly an exemption to the Obamacare insurance requirement if you can’t find an affordable health plan. But I’m having difficulty obtaining information about it. Can you explain?
A: There is, indeed, such an exemption. And there are many others.
First, a refresher: the Affordable Care Act (ACA) requires most people to have health insurance or face a tax penalty. If you were uninsured for all – or part – of last year, judgment day is approaching with the April 15 tax filing deadline.
I won’t describe the actual penalty amounts in detail because I’ve written about them before. (You can search my previous columns at centerforhealthreporting.org.) In short, some of you could owe hundreds or thousands of dollars for remaining uninsured last year.
But Obamacare gives some people an “out” in the form of exemptions. And by “some people,” I’m talking millions.
The Congressional Budget Office has predicted that roughly 30 million still will be uninsured in 2016, when the penalties reach their maximum levels. Of those, it estimates more than 23 million will qualify for one or more exemptions.
To see a complete list of the exemptions, google “healthcare.gov Obamacare exemptions.” (Trust me.) Meanwhile, to give you an idea, you qualify if:
- you’re uninsured for less than three consecutive months of the year.
- you didn’t qualify for Medicaid because your state didn’t expand eligibility for the program under Obamacare. (This doesn’t apply to Californians because we did.)
- you cannot find “affordable” coverage, meaning the cost of your premium would be more than 8 percent of household income.
- your household income is low enough that you’re not required to file a federal tax return. For tax year 2014, the tax-filing threshold for individuals under 65 is $10,150 and it’s $20,300 for married couples filing jointly. (You don’t have to file a return to obtain this exemption.)
- you qualify for one of 14 “hardships” that include homelessness, domestic violence, the death of a close family member and bankruptcy. You can find all of them on the healthcare.gov website.Warning: You’ll need to prove some of these hardships. And these exemptions aren’t necessarily granted for the full year, but are based on the duration of the hardship.
Wouldn’t it be great if there were one simple way to apply for any exemption? It would, but there isn’t. Assuming you’re eligible, you also have to reapply each year, says Karen Pollitz, a senior fellow at the Kaiser Family Foundation.
“In some cases, it’s automatic. You don’t have to lift a finger. In other cases, you just check a box on your tax return,” she says.
But “in some cases, you would have to file a written application,” she says.
In general, it’s the federal government, not the state, that approves – or denies – your exemption.
So, how do you know which exemption requires which action? Again, please trust me when I suggest you google “IRS chart ACA exemptions.”
The tax preparation software TurboTax estimates that three of four people who are eligible for exemptions will automatically qualify when they file their tax returns.
What about the others?
This brings me back to the original question about the affordability exemption, which applies when the minimum amount you would have paid for health insurance premiums is more than 8 percent of your household income.
This exemption can be claimed on your taxes but requires you to fill out a worksheet.
You’ll need to figure out what the lowest-cost bronze plan from Covered California would have cost you, or the cheapest coverage from your employer. Math is required.
“My piece of advice for people is to make sure you’re not eligible for any other exemption first,” says Tara Straw, senior health policy analyst for the Center on Budget and Policy Priorities. “This is kind of like your last-ditch exemption.”
There’s also a way to apply for the affordability exemption for months in the future, as opposed to requesting it on your taxes for the previous year. Why would you do this? For one, by showing you can’t afford regular plans, you could become eligible for a cheaper catastrophic plan that has much higher out-of-pocket costs.
To apply proactively, you have to fill out a different complicated form available at marketplace.cms.gov.
Luckily, there’s help for consumers.
To start, Straw suggests you download the IRS instructions for the exemptions, called “2014 Instructions for Form 8965.”
And TurboTax, for example, offers a free, online tool (www.TurboTaxExemptionCheck.com) that can help you figure out whether you qualify for any of the exemptions, and if so, help you apply.
Since we’re dealing with tax laws, bureaucracies, crunching numbers, human error and more, my best advice would be to consult a tax professional, especially for one of the more complicated exemptions.
In the end, thankfully, most people will avoid this process altogether.
“If you had coverage all year long, there’s just a box on your taxes that says ‘I had coverage for all 12 months of 2014’,” Pollitz says. “If you can check yes, you’re done.”
Click here to find previous Ask Emily columns.