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In this article, I will explain the new health care regulations – ObamaCare- in a simple and easy to understand terms. I want to leave you with a clear plan of action which will finally put you at ease when it comes to your health insurance for 2014.
As your tax professional, I will give you a brief overview of ObamaCare in general. Next, I will concentrate on the part where ObamaCare is highly integrated with your income taxes. Included, you will find examples with dollar amounts calculating your tax credit, cost sharing deductions, and potential penalties.
Let’s define what Obamacare is and the philosophy behind it:
Affordable Care Act (ObamaCare) is set of laws or rules that govern new health care industry. The philosophy underpinning the Affordable Care Act (ObamaCare) is that every American will either be covered and carry minimum health coverage, qualify for an exemption, or pay a penalty.
Here are some estimates how most of us will be covered:
50% of all Americans will be covered with insurance purchased through their employer
30% will be covered via government sponsored plans like Medicare or Medicaid
10% will buy insurance on their own via insurance brokers or new government run Marketplace
10% are expected not to have insurance for one reason or another
Let’s define what Obamacare is not:
It is not government insurance like Medicare or Medicaid, although, if your employer doesn’t offer health insurance and you end up buying it from the marketplace, the government will help you pay for it much like in the case of Medicaid. Government assistance will come in the form of a Premium Tax Credit.
What are major benefits of Obamacare that will affect you?
Starting in 2014, you cannot be turned down by insurance companies because of your preexisting conditions
Your rates cannot be raised unfairly (inflated)
Set new minimum coverage standards for all health care plans by insuring some basic preventive care coverage have no out of pocket cost
All the plans are required to cover a minimum percentage of your medical costs (60%)
No annual or lifetime limits on your plans
Your kids can stay on your policy until they are 26
Creation of Marketplace -one big online store where you can shop for an insurance
How does all this work and where do I start?
Even though most of us must carry insurance starting January 2014 let’s look at the list of circumstances that will allow you not to have insurance with no penalties. These are commonly known as Exceptions:
If your premiums cost more than 8% of your household income
If your income is below filing requirements (single people $ 10,000 or married $20,000)
If you are exempt for religious reasons who can elect exemption from self-employment taxes
If you reside outside of U.S.
If you are incarcerated or not legally present in the U.S.
If you are member of Indian tribe
So if you can identify yourself in the list above you are safe for the time being and most likely will not face a penalty as long as you maintain that same status. But if not, then keep reading.
Your next step should be to check if you employer provides affordable minimum essential coverage.
If you are not sure, print this worksheet and have your employer fill it out.
If YES, most likely your best option is to choose the best affordable coverage for you and your family.
If NO, you have three options.
1. Check if you qualify for Medicaid. Here In Florida, the state didn’t extend Medicaid so your best bet Is to apply and see if you qualify.
2. Buy private insurance via an insurance agent
3. Buy private insurance through the new Marketplace – here in Florida we don’t have a state run marketplace so the Federal program is an option: www.HealthCare.gov
Now this is very important. The only way to qualify for a Premium Tax Credit and Cost Sharing Deduction-you must buy your insurance through the Marketplace at the website mentioned above. And that’s exactly what we are going to talk about next.
Buying Insurance Through the Marketplace
Once more, at the Marketplace you are buying or shopping for insurance from regular private insurance companies like Cigna, Aetna, Humana etc. the only difference here is that the government is hosting and monitoring this marketplace by providing the venue in the form of the website.
At the Marketplace you are getting many things but the most important one is affordable monthly premiums and out of packet expenses in the form of:
Premium Assistance Tax Credit
Coast Sharing Reduction Program
So now let’s discuss both of them in more detail.
Premium Assistance Credit
To qualify for this credit your family income must be less than four times the federal poverty level and you must not have access to affordable health insurance thorough your employer. If you qualify, the credit amount is meant to be paid directly to insurance companies and you would be required to pay the rest of the premiums.
Essentially, based on your income and family size you will be given a maximum dollar amount that you are expected to spend on your health premium (cost) and government would subsidize the rest.
Maximum out of packet will depend on your family size and family income, but here are two examples for a single person and a family of four.
For a non-tobacco using single person these are generally the MAXIMUM amounts a person would pay per month for insurance.
133% of FPL = $15,320 Annual income = 3.0% AP = $36 per month insurance payment
150% of FPL = $17,235 Annual income = 4.0% AP = $57 per month insurance payment
200% of FPL = $22,980 Annual income = 6.3% AP = $121 per month insurance payment
250% of FPL = $28,725 Annual income = 8.05% AP = $193 per month insurance payment
300% of FPL = $34,470 Annual income = 9.5% AP = $273 per month insurance payment
400% of FPL = $45,960 Annual Income = 9.5% AP = $364 per month insurance payment
For a non-tobacco using family of four these are generally the MAXIMUM amounts they would pay per month for insurance.
133% of FPL = $31,400 Annual income = 3.0% AP = $79 per month insurance payment
150% of FPL = $35,325 Annual income = 4.0% AP = $118 per month insurance payment
200% of FPL = $47,100 Annual income = 6.3% AP = $247 per month insurance payment
250% of FPL = $58,875 Annual income = 8.05% AP = $395 per month insurance payment
300% of FPL = $70,650 Annual income = 9.5% AP = $559 per month insurance payment
400% of FPL = $94,200 Annual Income = 9.5% AP = $746 per month insurance payment
If a taxpayer purchases other plans (bronze, silver, gold, or platinum) or is a tobacco user, the taxpayer will pay the difference. The credit won’t affect the ‘extra’ amount.
Remember, you only qualify for this credit if you are not covered or do not qualify for any other insurance such as Medicare, Medicaid, COBRA or are not covered at work. You also must purchase insurance through the Marketplace and meet the above-mentioned requirements.
Cost Sharing Reduction
If your income falls below a certain amount you would qualify for this benefit as well. It is designed to put a limit for out of pocket expenses for the year.
In-network annual “out of pocket” maximums:
Less than 100% of FPL qualify for Medicaid (Some states are 133%)
100%-200% of FPL = $2,117 for individuals, $4,233 for families
200%-250% of FPL = $5,080 for individual, $10,166 for families
Higher than 250% of FPL = $6,350 for individuals, $12,700 for families
Cost Sharing Reduction only works if you buy silver plan (second from the bottom) AND you MUST apply for it when purchasing insurance thought Marketplace (some people call it Exchange).
At the end, if you establish that you are required to carry insurance and you are not exempt under any circumstances, but you ignore it and do nothing, you will face consequences in the form of the penalty assessed to you on your tax return.
The penalty will be factored in over the next three years, 2013 being the cheapest one.
The penalty is calculated in two different ways, and the higher amount is imposed. So do not believe that the maximum penalty for this first year is $95. It’s misleading and here is why:
To better understand the way the penalty is calculated let’s look at one example. We are going to calculate the penalty for a family of five that makes $60,000 per year, and let’s say this family has 2 adults and 3 kids.
First way: Flat Amount Penalty
It is $95/ person and $47.5/ child under 18 with maximum amount of penalty of $285 in the first year.
Using these numbers we would calculate flat penalty this way: $95+$95+47.5+47.5+47.5=$332.5 but since maximum penalty under this flat way is $285 we would take this number and compare it with our:
Second way: Percentage Amount Penalty
Percentage amount is 1% of families’ total income over your filing requirements ($10,000 for single and $20,000 for MFJ filers. In this instance, family income includes dependents’ income as well. So in the case of our family, percentage penalty would look like this: $60,000- $20,000 x1%=$400. Maximum penalty under percentage way is national average yearly premium.
At this point we would compare $285 (flat penalty) with $400(percentage penalty) and choose higher one of $400.
Remember, these numbers are only for 2014 and they only go higher each year.
If you have any questions please contact us. We are here to help.
IRS Circular 230 Disclosure: Any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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