While Term health insurance is an affordable alternative to Obamacare, coverage does not prevent people from paying the uninsured tax under the Affordable Care Act. Below is an overview of the tax, its costs, who has to pay it, and who may be exempt.
The tax applies to individuals who have gone without a qualified health plans (such as Obamacare or employer-based plans) for three months or more within a calendar year. Term Health plans are designed to be for a defined period of time. Thus, a consumer who has a Term Health plan for a period of less than three consecutive months, and Obamacare coverage for the remainder of the year, may not be subject to the uninsured tax.
For those who are considering Term Health for three months or longer, the tax is prorated based on the number of months a consumer went without coverage compliant with the Affordable Care Act (“ACA”). Taxpayers will be charged a portion of the total penalty for the months that they are considered not covered by an ACA plan.
For 2016, the uninsured tax is the higher of the following two amounts: 1
A common misconception about the Obamacare uninsured tax is that the tax is based on total household income. However, the uninsured tax is only based on taxable income over the tax filing threshold. Individuals with household income less than the tax filing threshold do not have to pay any uninsured tax. Taxable income includes salary, adjustments for additional income, exemptions, and deductions. People pay the uninsured tax when they file their tax return for the year that they were uninsured.
Since term insurance plans are not considered qualified health plans under the Affordable Care Act, people that enroll in a term health insurance plan have to pay the uninsured tax unless they qualify for one of the exemptions to the uninsured tax. The Congressional Budget Office has projected that only 3.9 million Americans will pay the tax for being uninsured in 2016.3
There are many exemptions to the Obamacare uninsured tax including: 4
People can also qualify for an exemption based on the following hardships:
The IRS provides additional information on exemptions from the Obamacare uninsured tax. In order to receive the exemption, an individual must file a request with the IRS and be approved. As noted by investor website The Motley Fool, an unconventional approach for people that do not qualify for an exemption but still desire not to pay the uninsured tax is to forego a tax refund.5 The tax penalty is paid out of a person’s would-be tax refund so, technically, if a person does not receive a tax refund then the Obamacare tax will not be taken out. If someone uses this approach, then they must also be careful to avoid the penalty for underpaying taxes, and they must also avoid having a tax refund in future years.
The following types of plans count as qualified health plans, so people enrolled in these plans would also not need to pay the Obamacare uninsured tax6:
Each individual’s tax situation and health insurance needs are different. To calculate their specific tax penalty, consumers should consult a tax expert, or use a calculator such as the one available at: http://taxpolicycenter.org/taxfacts/acacalculator.cfm.
This article is offered for informational purposes and not advice. For advice on Obamacare tax obligations, always consult a professional tax consultant.