Article by: Jeff Skolnick, CPA, M.S. Taxation

The Tax Cuts and Jobs Act passed in December of 2017 eliminated the “individual mandate” of the Affordable Care Act (ACA) or (Obamacare). The individual mandate required individuals to purchase health insurance that met certain standards, or they would be subject to a penalty.  This penalty was calculated based on household income and the number of individuals covered within the household.

The new tax legislation had virtually all of its provisions take effect in 2018. One provision that did not come into play until 2019 was the repeal of the individual mandate.  As of 2019, if you do not have health insurance you will not incur a penalty on your Federal return.  

If that is the case, why would I say not so fast?  The reason for this statement is that some states have passed legislation which still requires individuals to maintain health insurance or incur a penalty on their state income tax returns. I urge every taxpayer to at least check once in a while and make sure they are aware of whether their state has instituted such legislation.

Massachusetts has had an individual mandate since 2007. New Jersey and Washington DC have both reinstated the ACA penalty beginning in 2019.  California, Rhode Island, and Vermont have also instituted penalties equivalent to the ACA penalties; however, these do not become effective until 2020.  I have recently read that other states, specifically Connecticut, Hawaii, Minnesota, and Washington, are also contemplating enacting similar laws.

I point this out because there was a lot of coverage at the time the Federal law passed about this repeal, but I do not feel the states that have issued mandates have been as visible, and I do not like to see anyone surprised come tax season.

I want to be clear the penalties I have been discussing so far only relate to individuals that did not have health care insurance that met the rules set forth by the Federal government.  If your coverage met the standards, you had no penalty.

I now would like to touch on the part of the ACA that remains. The premium tax credit provision still exists in the law. The premium tax credit is available to individuals that have low or moderate-income to help them afford coverage provided by the Health Insurance Marketplace.  

There are two ways in which to receive this credit. The first, and by far the more popular choice, is to have the marketplace calculate your expected credit and pay it to your insurance company to lower your monthly outlay.  The credit is based on your household income and number of individuals covered.  The second option is to pay all of your health insurance payments and receive the credit at the end of the year. It is clear why the first method is more popular. Health insurance is a major expense for most individuals and certainly for all who are going to receive a subsidy, so most simply do not have the money to lay out ahead of time and wait for a credit.  

I want you to realize that whichever method you choose, the amount of the credit is exactly the same.  

I will now explain that although I understand the first method, why I hate it as an accountant. If you are to receive a monthly benefit, you must understand that this is based on your estimated income and number of individuals covered.  If your actual income is higher or the number of individuals covered is lower than what you had given to the Marketplace, then you will owe money at the end of the year. If you overestimated your income or underestimated the number of individuals covered you may receive a refund at yearend.  I hate it because more often than not I have seen individuals that owe money rather than receive a refund. The problem is I have to, as an accountant, explain this to them.  Keep in mind I’m used to catching a little hell when individuals owe taxes, but here I’m catching hell for the fact that their credit was too high during the year when I didn’t give the insurance company their income or dependents, they did. 

I want to give you an example I ran into a few years back. I had an individual who reported his family income to the marketplace. He also reported the expected number of dependents. When we filed his return at the end of the year, he realized that one of his children who was covered in the prior year was now working a full-time job and not covered by him.  When I prepared the return I had to let this man know he had to pay back thousands of dollars to the Federal government.  This situation, unfortunately, resulted in me having a new name for this individual, former client.

I point this story out not to communicate that those eligible should not sign up to receive their credit monthly but to point out that if you do be careful about the information you give the Marketplace.  If during the year you discover that either your income is going to be greater than expected or the number of covered individuals will change alert the Marketplace.  Once again, I want to make sure there are no surprises that occur when you file your return.

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