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Coming Changes in Health Care – What You Need to Know Now

Posted on November 13, 2012 by

Affordable Care ActOn March 23 and 30, 2010, President Obama signed into law two significant health care bills titled “Patient Protection and Affordable Care Act” and “Heath Care and Education Reconciliation Act,” respectively. This historic legislation took about a year to put together and pass. It covers many aspects of our healthcare system with new laws related to insurance companies, Medicare, hospitals, and you. Information from your 2012 tax return will be used when obtaining health insurance in the fall of 2013 through the Affordable Insurance Exchange in your State. The following is a summary of the Affordable Care Act provisions that you need to be aware of for tax and insurance planning, as it will affect you and your family.

You must have health insurance — Effective in 2014, you must obtain and maintain a minimum level of health insurance or else you could be subject to penalties. The following are the penalties that apply:

  • Starting on January 1, 2014, the penalty will be $95 (per taxpayer and dependent) or 1% of your income, whichever is greater.
  • In 2015, the penalty will be $325 (per taxpayer and dependent) or 2% of your income, whichever is greater.
  • In 2016, the penalty will increase to $695 (per taxpayer and dependent) or 2% of your income, whichever is greater.

New insurance marketplaces put in place — Effective on October 1, 2013, new state health insurance marketplaces called “Affordable Insurance Exchanges” (or “Exchanges” for short) will be available. The Exchange will be a one-stop shop for anyone that wants to purchase insurance. Exchanges will begin to help taxpayers obtain health insurance and determine eligibility for receiving financial assistance (“subsidy”) to help pay for their insurance premiums.

Plan on having insurance this coming year — As just stated, everyone is mandated to carry health insurance by the end of next year. If you don’t, you will pay a penalty during tax time starting at $95 or 1% of your income, whichever is greater. That means a family with an income of $50,000 would have to pay a $500 penalty (assuming one year without insurance) that is tacked onto their tax return. The penalty is calculated on a month-to-month basis, so it is important you apply for health insurance as soon as you can to avoid fines. You can shop around and apply for health insurance either in an exchange (starting October 1, 2013) or outside the exchange, but make sure you plan to do this before 2013 ends.

Government subsidies to assist taxpayers in purchasing health insurance — Effective in 2014, premium assistance subsidies will be available through the Exchange to ensure people can obtain affordable coverage. Based on your income and household size from your 2012 tax return, the Exchange will determine your affordable premium amount (your maximum out-of-pocket amount) that you will have to pay each year. Assistance will be available to people ineligible for other acceptable coverage, such as Medicaid, and their incomes are below 400 percent of the federal poverty level. For example, a family household of 5 making under $108,040 may qualify for a subsidy. The subsidy amount is the difference between the total premium for the “benchmark plan” in your state and maximum out-of-pocket amount you pay. The subsidy amount you qualify for goes directly to the insurance company.

Insurance companies cannot deny adults with pre-existing conditions — Effective in 2014, all health plans will be prohibited from denying coverage to adults with pre-existing conditions.

New bans on insurance discrimination — Effective 2014, insurance companies will be prohibited from engaging in discriminatory practices that refuse to sell or renew policies due to a person’s health problem or pre-existing conditions. Insurance companies are banned from charging higher rates due to such things as health status and gender. Premiums can only vary depending on age, geography, tobacco use, and family size. Insurance plans can only vary by a maximum of 3-to-1 ratio when setting premiums based on age.

Medical threshold for medical deductions to 10% of income — Starting in 2013 tax year, you will only be able to deduct medical costs that are over 10% of your income. This is an increase from the current 7.5%. This means your medical deduction on your return will be more limited resulting in smaller refunds. For individuals age 65 or over, the threshold will remain at 7.5% until 2016.

Rebates issued by insurance companies may be taxable — Health insurance companies are required to spend most of the premium dollars on health care, not on profits and overhead. The insurance company is required to rebate any excessive fees to back to enrollees. If a tax benefit was previously gained on the premiums now being refunded (such as pre-tax dollars through a cafeteria plan), the rebate is taxable to federal income and employment taxes (if self-employed). If no tax benefit was gained, the rebates are tax free to the recipient.

Comments and Advice

Keep in mind that if your situation changes, such as you begin receiving health insurance coverage through an employer or your income has increased, you should get in touch with the Exchange as soon as possible so that the subsidy amount can be adjusted. If you fail to do so, tax will be added to your return to repay any subsidy amount you should not have received during the year.

In the coming weeks until years to come, you will no doubt hear more information about these new regulations from our government and media. The reorganization to our today’s health care is just that—reform. These are not just tiny “who cares?” type of changes coming from lawmakers in Washington. This mammoth health overhaul will transform the health care foundation that we currently know today. Understanding what the bill means to you today can help prepare you and your family to make essential decisions on health care in the future.

Vincent Mangiapane, EA
Federal Analyst, Taxbrain

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