How Does Obamacare Affect Your Taxes?

The Affordable Care Act (ACA), often known as Obamacare, reshaped healthcare in the United States. This legislation introduced various tax provisions designed to expand health insurance coverage and provide funding for the broader healthcare system. These tax-related elements impact individuals and families, influencing their financial planning and tax filing obligations.

Premium Tax Credit

The Premium Tax Credit (PTC) is a refundable tax credit established by the ACA to help eligible individuals and families afford health insurance purchased through the Health Insurance Marketplace. This credit aims to reduce the financial burden of health insurance premiums.

Eligibility for the PTC is determined by household income, family size, and whether affordable health coverage is available from other sources. Individuals and families with household incomes at or above 100% of the Federal Poverty Level (FPL) who purchase a health plan through the Marketplace may qualify. Individuals are typically ineligible if they can access affordable employer-sponsored coverage that provides minimum value or are eligible for government health coverage like Medicaid or Medicare.

The PTC amount is calculated based on a sliding scale, considering your household income and the cost of the second-lowest-cost silver plan available in your area through the Marketplace, known as the “benchmark plan.” Your expected contribution towards the premium is determined as a percentage of your income, with lower-income individuals expected to contribute a smaller percentage. The credit then covers the difference between your expected contribution and the cost of the benchmark plan.

You can choose to receive the PTC in one of two ways: either as advance payments (APTC) directly to your insurance provider to lower your monthly premiums, or as a lump sum when you file your federal tax return. If you receive advance payments, you must reconcile the amount received with the actual credit you qualify for based on your final household income for the year using Form 8962. If your income turns out to be higher than estimated, you might have to repay some or all of the advance payments; conversely, if your income was lower, you could receive an additional refund.

Taxes for High-Income Earners

The ACA introduced specific taxes that primarily affect high-income individuals. These provisions apply to certain earned income and investment income above statutory thresholds.

One such tax is the Net Investment Income Tax (NIIT), a 3.8% tax on certain investment income. This tax applies to individuals, estates, and trusts with net investment income exceeding specific modified adjusted gross income (MAGI) thresholds. For individuals, these thresholds are $200,000 for single filers and heads of household, $250,000 for married couples filing jointly or qualifying widow(er)s, and $125,000 for married individuals filing separately.

The types of income subject to the NIIT generally include interest, dividends, capital gains, rental and royalty income, and income from passive activities. The tax is levied on the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.

In addition to the NIIT, the ACA also established the Additional Medicare Tax. This 0.9% tax applies to earned income exceeding certain thresholds, including wages, self-employment income, and Railroad Retirement Tax Act (RRTA) compensation. The thresholds are $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.

Reporting Health Coverage on Your Tax Return

The ACA included provisions for reporting health coverage on tax returns. Although the federal penalty for not having coverage was reduced to $0 for tax years beginning after 2018, individuals still need to report their health coverage status when filing their federal tax returns. This reporting is for informational purposes to confirm that you and your household members had qualifying health coverage throughout the year.

One such form is Form 1095-A, Health Insurance Marketplace Statement, sent by the Health Insurance Marketplace to individuals who purchased coverage through them. This form is important if you received advance payments of the Premium Tax Credit, as its information is necessary to reconcile the credit on Form 8962. You do not attach Form 1095-A directly to your tax return, but you use the details it provides to complete other tax forms.

Another form you might receive is Form 1095-B, Health Coverage. This form is issued by health insurance providers for coverage obtained outside of the Marketplace, such as through private plans, Medicaid, or Medicare. Form 1095-B verifies that you had minimum essential coverage for some or all of the year, identifying the policy holder and covered individuals. This form should be kept with your tax records; it is generally not submitted with your tax return.

Large employers, those with 50 or more full-time employees, issue Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. This form reports information about the health coverage offered to employees, including whether the employee enrolled in the coverage. Like Form 1095-B, Form 1095-C is an informational document for your records and is generally not required to be attached to your federal income tax return.