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How exactly is Obamacare going to affect your taxes? (Q&A)

One of the most controversial provisions of the Affordable Care Act (ACA) is that most Americans must purchase health insurance or pay a penalty. This penalty comes in the form of a tax. For 2014, an individual who chooses not to buy health insurance will pay a penalty of $95, or 1 percent of his or her income, whichever is higher.

Obamacare-tax-issueHowever, this isn’t the only tax concern raised by Obamacare, and many consumers are confused about what the new law means for their bottom line. spoke with Theodore Seto, professor of law at Loyola Law School in Los Angeles, California to learn more about how the Affordable Care Act will affect your taxes.  

What is the Obamacare individual mandate and what does it mean for the average consumer?

The individual mandate is a requirement that all eligible Americans have at least basic health coverage. Since most Americans get health insurance   through an employer,  the individual mandate won’t affect the majority of consumers.

But it will impact those who are unemployed, underemployed, or self-employed. If you don’t have health insurance or have a policy that doesn’t provide basic health coverage, as required by the ACA, you must get coverage. Unless you’re exempt from the health care law, you must  purchase a qualified health plan. In other words, if your insurance is too skimpy to meet the minimum standards of the ACA, you’ll have to upgrade your policy.

What is the tax for violating the Obamacare individual mandate and how will it be spent?

An individual who fails to comply with the individual mandate is required to pay an additional income tax at a rate of one percent in 2014, rising to 2.5 percent in 2016. This additional income tax is subject to both a floor and a cap.

First, the floor: the additional tax can’t be less than $695 in 2016, with a smaller floor for children and an overall cap per family.

Second, the cap: the total additional tax cannot exceed the national average of the annual premiums of a "bronze level" health insurance plan. This additional income tax will ordinarily be reported and paid when the individual files his or her income tax return each year.

Any revenues collected as a result go into the government’s general fund, which is  the same place other income taxes go.

Who is exempt from the Obamacare individual mandate?

The most important exemptions are for:

  • members of certain religious groups and Native American tribes
  • undocumented immigrants
  • prisoners
  • individuals with income too low to file an income tax return ($10,000 for single filers and $20,000 for joint filers for 2013).
  • those who would have to pay more than 8 percent of household income for coverage

Will the Obamacare individual mandate motivate uninsured Americans to buy health insurance?

No one knows for sure, but Americans tend to be law-abiding. So  a large percentage of uninsured Americans who are not exempt from the mandate will likely comply with it.

Other provisions of the ACA will make it much easier for uninsured Americans to buy health insurance. For example, there are no annual or lifetime limits on benefits, you can’t be denied coverage for being  sick or injured, nor can you be charged more due to a preexisting medical condition.

In the past, these issues often kept Americans from getting health coverage. The ACA will also require benefits to be explained in easy-to-compare formats. In the past, it was often hard to tell whether one plan was more consistent with a consumer’s needs than another. By solving these problems, the ACA makes it more likely that uninsured Americans will buy health insurance.

How do the health care tax credits work and who can claim them?

The amount of financial assistance you can get in the form of a tax credit depends on your income, the number of people in your family,  and whether you can get coverage through an employer.  Generally, the tax credits are limited to individuals and families with income less than 400 percent of the federal poverty level. For  2013, this comes to $23,550 for an individual or $94,200 for a family of four.

What happens if a taxpayer claims a health insurance tax credit in error?

The health insurance tax credit is subject to audit and adjustment just like any other entry on your tax return. If you mistakenly claim a tax credit that’s too high, you’ll be required to repay the amount you received in error.

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