Under the Affordable Care Act, Americans without insurance must pay a penalty when they file their federal tax returns. But recent efforts to repeal the ACA have caused some confusion. KBIA’s Michaela Tucker spoke with University of Missouri Extension Professor Andrew Zumwalt to clarify, before this year’s tax season is over.
When filing taxes, Americans can fall into three categories for the ACA tax penalty. If you have health insurance, there is no penalty. If you don't have insurance, you pay the penalty. The third category is you have a penalty, but are exempt from the payment. Zumwalt said exemptions include having income below the poverty level, being incarcerated, living outside the country and having unaffordable coverage.
This conversation has been edited for time and clarity.
Tucker: President Trump signed an executive order that impacts the ACA in a couple ways. The executive order's goal was to minimize the "unwarranted economic and regulatory burdens of that Act.” Does that relate to this penalty?
Zumwalt: I think it's a little unclear. One thing the IRS did do is they came out and they said if you file the return and it left your ACA situation kind of hazy — so let's say you didn't pay the penalty or did mark that you need to pay the penalty but you didn't have health insurance — this year, the IRS is going to institute a software change that basically said your return will be rejected.
They walked back from that, and that sounds like they're applying that executive order. But if you step back a little bit, it's been that way the past few years.
The IRS, I think, they are following the executive order, but they also took the easy way out saying, "we're not going to rejecting those returns this year," so it makes it a little easier on them. They don't have to implement a new software change but they look like they're still following the policy, so it works out.
Tucker: In section two of the executive order it says, "To the maximum extent permitted by law, the Secretary of Health and Human Services and the heads of all other executive departments and agencies with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.” There's a tiny part there that says that discretion available to “waive, defer or grant exemptions.” Does that mean the penalty is waived?
Zumwalt: Well it seems that within that reading there is the phrase “within the law.” The law still says there's a penalty applied. So the IRS has come out and said, “Hey, we're going to change our software policy on this so that we don't reject those tax returns” that are unclear about the penalty. But the law still applies. There is a penalty if you don't have insurance or you don't have an exemption.
Tucker: Isn't the IRS too under-resourced to notice if I don't pay the penalty?
Zumwalt: Two things. One is I absolutely agree that the IRS under resourced on their budget. Having said that they're getting much better at analyzing returns. Many of the returns that we see that come back, the issues are found by a machine. The software looks at a return and says, "OK, there's no exemption, there's no penalty, send out a letter saying ‘explain your situation.'"
So while I agree that the IRS is under-resourced, I wouldn't count on their under-resourcefulness to mean that you're not going to get a letter asking you to explain your situation.
Tucker: Is there anything else you think Missourians should know in these last couple days of tax season that's relevant to this issue?
Zumwalt: I I think it's really important to understand that taxes due on the 18th this year, the 15th is on Saturday. There are a lot of free sites across the internet we get your taxes done for free as well. I hope you haven't waited this long but there's still some resources out there if you have.