Health insurance tax: Is there still a penalty for skipping coverage?

This article was fact-checked by our editors and reviewed by Christina Taylor, MBA,senior manager of tax operations for Credit Karma. It has been updated for the 2019 tax year.

The Affordable Care Act remains the law of the land, but the Tax Cuts and Jobs Act of 2017 made a very significant change to the law known as Obamacare.

Tax reform didn’t repeal the ACA. Instead, it set to zero the penalty for going without health insurance. The so-called individual mandate, or “health insurance tax,” was one of the most hotly debated aspects of the ACA.

The basics of the health insurance tax

The goal of the Affordable Care Act was to increase the number of Americans covered by health insurance. One way the act aimed to do that was by penalizing Americans who could afford health insurance but chose to go uninsured anyway.

If you could find health insurance that would cost 8% or less of your monthly household income, the individual mandate required you to have health insurance or face a penalty for going without it. If you couldn’t find coverage that met that affordability criteria, you wouldn’t be penalized.

The individual mandate penalty could be calculated in two ways during 2017.

• As a flat penalty of $695 per adult and $347.50 per child, up to a maximum of $2,085 per household, or
• As 5% of annual household income

You would pay whichever calculation imposed the higher tax. To avoid this tax, you’d need to qualify for an exemption or have qualifying coverage, which means an eligible policy offering certain essential benefits such as maternity care.

The Tax Cuts and Jobs Act didn’t repeal this mandate. However, the tax reform bill set the penalty for noncompliance to zero after Dec. 31, 2018.

Will you still have to pay a health insurance tax?

As things stand now, you won’t need to worry about being taxed by the IRS. However, a growing number of localities — including New Jersey, Vermont and Washington, D.C. — have proposed their own mandates. This means that depending on where you live, you may owe health insurance taxes if you aren’t covered, even after the IRS no longer imposes a penalty.

Is the rest of the ACA still in effect?

Even with the change to the individual mandate, much of the framework put in place by Obamacare remains in effect. Some of the key provisions of the ACA that remain the law of the land include …

• Protections for people with preexisting conditions: Insurers cannot deny coverage or charge you more if you’re sick.
• Taxes that fund Obamacare: These include an additional 0.9% Medicare tax on income exceeding $250,000 for married couples filing jointly, $125,000 for married couples filing separately, and $200,000 for single filers, heads of household or qualifying widows or widowers with dependent children.
• Expanded Medicaid coverage: This allows individuals in states that have accepted the expansion to qualify for Medicaid with incomes up to 138% of the federal poverty level.

Some of the ACA Provisions have changed in important ways

While much of the Affordable Care Act continues to operate as the law sets forth, the Trump administration has taken certain important steps to change the ways people obtain health insurance and to alter how the ACA works. For example:

• The ACA provides for discounts in out-of-pocket limits, deductibles, and coinsurance payments for low-income policyholders through cost-sharing reductions. The Trump administration announced in October 2017 that it would no longer reimburse insurers for these payments. The Henry J. Kaiser Family Foundation responded to the announcement by stating the move would result in higher premiums in 2018 than otherwise would be expected.
• The Trump administration announced a final rule to allow short-term plans of just under a year, renewable for up to 36 months. Obamacare had limited the duration of short-term plans — which are not subject to Obamacare’s rules on preexisting conditions and minimum essential benefits — to no more than three months. Short-term plans will be available during open enrollment for 2019 and are expected to cost less but provide less coverage.

Many experts believe these changes have destabilized the insurance market.

However, there is some good news for Obamacare. After multiple years of large premium increases, premiums for some Affordable Care Act exchanges may actually decline.

A Kaiser Family Foundation analysis predicts 2019 premiums will fall in multiple states, including Colorado (6% for the lowest-cost Bronze plans), Minnesota (16% for the lowest-cost Gold plans) and New Jersey (13% for Bronze plans and 17% for Gold). However, in states where premiums will rise, some of the increases are significant, such as 14% in California for Bronze coverage and 11% in Washington, D.C., for Gold plans.

Will the ACA eventually be repealed?

While the Affordable Care Act remains the law of the land, its future is still far from certain and repeal is not necessarily off the table going forward.

“If the Democrats gain control of either the House of Representatives or the U.S. Senate, then the ACA will remain the law of the land,” says Etienne Deffarges, policy expert, former senior partner at Booz Allen Hamilton and author of “Untangling the USA.” “If the Republicans retain control of both the House and the Senate, the probability that the ACA will be repealed is very high: The Republicans would be emboldened by such a victory and would most probably attempt in 2019 to repeal the health care law — again.”

Additionally, there are multiple lawsuits seeking to either overturn the ACA or preserve it.

But it’s not just about the tax …

Starting Jan. 1, 2019, Americans who don’t have health insurance aren’t subject to a penalty. But not having coverage means you will face all the risks that come with being uninsured.

Without health insurance, a single illness could cause financial devastation. In fact, a study from the New England Journal of Medicine found rates of bankruptcy rise “sharply” following a hospital admission. This is unsurprising when the average cost of a three-day hospital stay is about $30,000.

Money troubles aren’t even the worst possible outcome of being uninsured. A 2009 study from the American Journal of Public Health found that close to 45,000 deaths each year in the United States are linked to a lack of health insurance coverage.

Not having health insurance could cost you more in the long run than paying insurance premiums would.

Bottom line

If you don’t have health insurance and don’t qualify for an exemption, you’ll still be penalized when you file your taxes in April. In 2019 and beyond, if you don’t have qualifying coverage providing essential health benefits, you may be taxed by your state. Even if you aren’t subject to a tax, you may still be eligible to buy a subsidized policy and benefit from other protections the ACA has put in place. Be sure to get covered to avoid potential financial disaster.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.