Understanding the Affordable Care Act

Key takeaways

• The Affordable Care Act (ACA) aims to provide more people with quality health coverage and reduce healthcare costs.
• The ACA uses modified adjusted gross income (MAGI) to determine eligibility for health insurance subsidies and other tax benefits.
• The pros of the ACA include prohibiting insurance companies from denying coverage based on health history and providing subsidies to reduce premiums and out-of-pocket costs.
• The cons of the ACA include small business challenges and limited provider options in some regions.
• The ACA affects taxes in many ways, including the Premium Tax Credit (PTC), reporting requirements with Form 1095-A, Health Insurance Marketplace Statement, the additional Medicare tax on high earners, and the Net Investment Income Tax.
• The PTC is a tax credit that aims to make health insurance more affordable, encourage higher enrollment rates, target support for those in need, and reduce the number of uninsured Americans.
• Form 1095-A provides information about health insurance coverage through the Healthcare Marketplace (Healthcare.gov) that you’ll need to complete IRS Form 8962, Premium Tax Credit, to reconcile the PTC on your tax return.
• The federal penalty for not having health insurance was repealed in 2019, but some states have their own individual mandates and penalties.
• If you live in a state with an individual mandate, generally, you can be without health insurance for up to three consecutive months without facing penalties.

What is the Affordable Care Act?

The Affordable Care Act (ACA) was signed into law in 2010 to provide more people with quality health coverage and reduce overall care costs.

A few things to know about the ACA

• Health insurance marketplaces are online platforms where individuals and families can shop for health insurance plans, compare different plans, and find one that fits their needs and budget.
• The ACA provides subsidies to eligible individuals and families to lower the cost of premiums and out-of-pocket expenses.
• The ACA expanded Medicaid, a government program that provides health coverage to low-income individuals and families by allowing more people to qualify based on income.
• The ACA requires all health insurance plans to cover essential health benefits, including prescription drugs, mental health services, maternity care, and emergency services.

How is income is to determine Affordable Care Act eligibility?

The ACA uses modified adjusted gross income (MAGI) to determine eligibility. However, to understand MAGI, it's helpful to first learn the difference between adjusted gross income (AGI) and MAGI.

AGI is your total income, which not only includes your wages but also capital gains, dividends, and interest, less certain adjustments, like contributions to retirement accounts and student loan interest payments. AGI is a key figure the IRS uses to determine your taxable income and eligibility for various tax credits and deductions.

MAGI takes your AGI and adds back certain deductions and exclusions. Not only does your MAGI help to determine your eligibility for health insurance subsidies through the ACA, but it the IRS also uses your MAGI to determine your eligibility for education credits and retirement plan contributions.

Affordable Care Act pros

The ACA has been beneficial for millions of Americans in many ways.

Here are some of the pros:

• The ACA made it illegal for insurance companies to deny coverage based on health history. This allows more people to get insured who were previously denied because of preexisting conditions
• The ACA provides subsidies that reduce monthly premiums and out-of-pocket costs, making health coverage more accessible and affordable.
• The ACA expanded Medicaid eligibility to cover more low-income adults, providing millions of people with access to health insurance who previously didn’t qualify.
• Under the ACA, all insurance plans must provide essential coverage to ensure that everyone has access to comprehensive care. This includes maternity and newborn care, mental health services, prescription drugs, and emergency services.
• The ACA promotes preventative care by requiring insurance plans to cover vaccinations, screenings, and check-ups at no additional cost. This helps doctors catch health issues early, leading to better overall outcomes and lower costs.
• The ACA allows young adults to stay on their parents’ insurance plans until age 26, helping many young people maintain health coverage during a transitional period in their lives.

Affordable Care Act cons

While the ACA has brought many positive changes, it also has some drawbacks and challenges. Here are some of the cons:

• Some small businesses have struggled with the ACA’s requirements to offer health insurance to employees.
• While the ACA expanded Medicaid, not all states chose to participate in the expansion. This has created a coverage gap where some low-income individuals earn too much to qualify for traditional Medicaid but not enough to receive subsidies for marketplace insurance.

How does the Affordable Care Act affect taxes?

The ACA has several implications for your taxes.

Here’s what you need to know:

• The Premium Tax Credit (PTC) helps to make health insurance more affordable through the marketplace for eligible individuals and families. You can either use it to lower your monthly insurance premiums or claim it as a lump sum (refundable credit?) when you file your taxes.
• The ACA mandate that required Americans without health insurance to pay a penalty was repealed in 2019. However, some states have their own mandates. If you live in one of these states, you may face a penalty if you do not have qualifying health coverage.
• If you receive health insurance through the Marketplace, you will get Form 1095-A, which shows the amount of PTC you received. You must use this form to complete IRS Form 8962, Premium Tax Credit and reconcile the credit on your tax return. Additionally, if your employer provides health insurance, you may receive Form 1095-B, Health Coverage, or 1095-C, Employer-Provided Health Insurance Offer and Coverage, which you should keep for your records.
• The ACA introduced an additional Medicare tax of 0.9% for high earners. This tax applies to individuals earning more than $200,000, or married couples earning more than $250,000. Employers are required to withhold this tax from wages above these thresholds.
• The ACA also introduced the Net Investment Income Tax, a 3.8% tax on investment income for individuals with an AGI over $200,000 and married couples with an AGI over $250,000. This tax applies to income from interest, dividends, capital gains, rental income, and other investment sources.

What is the purpose of the Premium Tax Credit

The PTC's purpose is to make health insurance more affordable and accessible for individuals and families with low to moderate incomes.

Here’s what you need to know:

• The PTC encourages more people to enroll in health plans by making healthcare more affordable. Higher enrollment rates mean a larger pool of insured individuals, which can lower premiums for everyone.
• Eligibility for the PTC is based on your household income and the size of your family. This ensures resources go to low- and moderate-income families who might otherwise struggle to afford health insurance
• By providing subsidies through the PTC, more people can obtain coverage. This helps reduce the number of uninsured Americans.

Form 1095-A, Health Insurance Marketplace Statement

Did you purchase coverage through the Marketplace? If so, the Health Insurance Marketplace will send Form 1095-A, Health Insurance Marketplace Statement, to you by January 31.

Form 1095-A provides information about the health insurance coverage through the Marketplace. This includes details about the insurance company, the type of plan, and the premiums you paid. Most importantly, it shows the amount of PTC you received in advance to help lower your monthly insurance costs.

When you file your tax return, you’ll need the information from Form 1095-A to complete IRS Form 8962, Premium Tax Credit, which helps you reconcile the advance payments of the PTC you received with the actual credit amount you qualify for based on your final income for the year.

If you received more credit than you were eligible for, you might have to pay back some or all the excess amount. If you received less, you could get the difference as a refund.

Carefully review Form 1095-A for any errors, such as incorrect personal information or coverage details. If you find any, contact the Marketplace immediately to get a corrected form. Accurate information is essential to correctly reconcile your PTC.

Does the IRS penalize you for not having health insurance?

No, the IRS will not penalize you for not having health insurance. The ACA initially included an individual mandate that required most Americans to have health insurance or face a penalty. But the Tax Cuts and Jobs Act, which was signed into law in 2017, repealed it. This change means that, at the federal level, you will not be fined for being uninsured.

However, some states have implemented their own individual mandates, requiring residents to have health insurance or face a penalty. States with such mandates include California, Massachusetts, New Jersey, Rhode Island, Vermont, and the District of Columbia. If you live in one of these states, you may still face penalties for not having coverage.

What is the IRS fine for not having insurance?

The IRS does not currently charge fines for not having insurance. However, some states have their own penalties for not having health insurance.

California:

• Penalty: At least the higher of $900 per adult and $450 per child or 2.5% of annual household income.
• Exemptions: Short coverage gaps (less than three months), unaffordable coverage, hardships, part-year residents, and specific other exemptions.

Massachusetts:

• Penalty: Based on income, age, and family size, up to half the cost of the lowest-price insurance plan available through the state's marketplace.
• Exemptions: Short coverage gaps (up to three consecutive months), unaffordable coverage, income below 150% of the federal poverty level, and other specific situations.

New Jersey:

• Penalty: The higher of $695 per adult and $347.50 per child or 2.5% of household income above the state tax filing threshold, with a maximum penalty set at the cost of a bronze plan.
• Exemptions: Short coverage gaps, unaffordable coverage, hardships, certain income levels, and other criteria.

Rhode Island:

• Penalty: The higher of $695 per adult and $347.50 per child or 2.5% of annual household income above the federal tax filing threshold.
• Exemptions: Short coverage gaps, unaffordable coverage, hardships, part-year residents, and specific other exemptions.

District of Columbia:

• Penalty: The higher of $745 per adult and $372.50 per child or 2.5% of household income above the district's tax filing threshold.
• Exemptions: Short coverage gaps, unaffordable coverage, hardships, and other specific situations.

How many months can you not have health insurance to avoid penalties?

If you live in a state with an individual mandate, there are typically some allowances for short gaps in coverage. This means you can be without health insurance for a brief period without facing a penalty. Generally, the rule is that you can have a gap of up to three consecutive months without health insurance in a calendar year and still avoid penalties.

Some states may have additional exemptions for specific situations, such as financial hardship, certain life events (like job loss or moving), or religious objections. It’s essential to check the specific exemptions and rules in your state.

Does the Affordable Care Act expire in 2025?

No, the ACA does not have an expiration date set for 2025 or any other specific year. Its future depends on the actions of lawmakers, the outcomes of legal challenges, and the political climate.

Have questions or concerns about the ACA and how it affects your taxes? Need help with Form 1095-A? Live in a state with an individual mandate? Jackson Hewitt Tax Pros are here to help. Book your appointment today.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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