The Affordable Care Act and Income Taxes

Barbara O’Neill, Ph.D., CFP®

Extension Specialist in Financial Resource Management and Distinguished Professor

Rutgers Cooperative Extension


For the first time ever, during the 2014 federal income tax year, health insurance became intertwined with income taxes. More than 75% percent of Americans with year-long health insurance provided by an employer, private insurance policy, or other non-Marketplace health insurance source simply have to check the “Full-year Coverage” box on Line 61 of the 1040 tax form. For others, the process of filing taxes will be more complex.

Two groups are people who need to complete additional paperwork are those who were uninsured for all or part of 2014 and those with Marketplace health insurance plans who received premium tax credits. It has been reported that about 85% of Marketplace health insurance purchasers in 2014 qualified for financial assistance.

With some specific exceptions, every American must have had a health insurance plan in 2014 or they face paying a government penalty. Payment is assessed and collected via federal income tax returns, which may necessitate an adjustment of estimated tax payments and/or W-4 form tax withholding. The IRS uses the term “individual shared responsibility payment” or ISRP to describe what most people refer to as “the fee,” “the tax,” or “the penalty” for not having health insurance. According to the Affordable Care Act (ACA), individuals, as well as government and large employers, have a responsibility to participate in the health insurance market.

The ISRP fee is relatively low for tax year 2014 but will increase significantly by tax year 2016. If Americans didn’t have coverage in 2014, they’ll pay the higher of the following two amounts when they file their taxes:

  • Flat-Dollar Amount– $95 per person for the year ($47.50 per child under 18). The maximum penalty per family using this method is $285 because the total household penalty is capped at three times the adult rate.

  • Percentage of Income- 1% of yearly household income above the tax filing threshold, which is about $10,000 for an individual. The maximum penalty is capped at the national average premium for a bronze plan (adjusted annually) which, for 2014, is $2,448 for an individual and $12,240 for a family of five.

Wealthier households will likely have to use the second method. In 2015, the fee is 2% of yearly household income or $325 per person for the year ($162.50 per child under 18) with a maximum penalty of $975 per family. In 2016, the fee rises again to 2.5% of income or $695 per person ($347.50 per child under 18) with a maximum penalty per family of $2,085. After 2016, all of these dollar amounts will be adjusted for inflation.

As part of the ACA, there are two ways to lower insurance premiums and out-of-pocket costs: a premium tax credit or PTC (for people earning up to 400% of the federal poverty level or FPL) and cost-sharing reductions (i.e., decreased deductibles and copayments) for those enrolled in a silver plan and earning up to 250% of FPL. Most people take an advanced premium tax credit (APTC) to lower their monthly health care premium costs.

During tax season, the IRS reconciles the total APTC received during the year with the amount of PTC that people qualify for based on their actual income and family size. If APTC was less than PTC, a taxpayer’s refund will increase by the difference or taxes owed will be lower. If APTC was greater than PTC, the difference will increase the amount owed and a person’s refund will be smaller or there will be a balance due.

Not surprisingly, when a new process is added to tax law, new forms are also needed. Those with a Marketplace health insurance plan will be mailed one or more 1095-A forms in January from the Marketplace where they obtained health insurance. Form 1095-A provides information that is needed to complete IRS Form 8962, which is filed with a federal income tax return.  People on Medicare or Medicaid do not receive a 1095-A form.

Form 8962 is used to reconcile premium tax credits with actual income. Another new IRS form, Form 8965, is required for people who qualified for exemptions from ACA Marketplace health insurance. Instructions for this form also explain how people without coverage should calculate the extra tax that they owe.

Fortunately, there is help for taxpayers who are confused about this new wrinkle in the tax filing process and the new ACA related tax forms. The IRS Volunteer Income Tax Assistance (VITA) program has trained volunteers who help people file their taxes. To find a local VITA site, visit and enter your zip code. Tax preparation help might also be available through local non-profit human services agencies.