Having health insurance is not just a recommendation in some states. In California, it is now a law. A new state law, effective January 1, 2020, requires all California residents to maintain a qualifying health insurance policy year-round. Residents who fail to maintain qualifying health insurance may owe a penalty when filing their state tax return unless they are granted an exemption.
Californians who did not previously qualify for federal health insurance may now qualify for a new state subsidy program which is expected to help more than 235,000 people. Learn more about this new health insurance mandate and why some individuals in California may face a hefty tax penalty at tax time.
A Brief History Of Healthcare Reform
In 2010, the Patient Protection and Affordable Care Act (ACA) or “Obamacare” was passed with the goal of making healthcare more accessible to people nationwide. The ACA prevented people from being denied or charged more for health insurance due to having preexisting medical conditions.
The federal mandate also required health insurance companies to meet specific requirements to ensure that people of any age or health status could receive coverage. Individuals who chose to remain uninsured faced a financial penalty during the tax season.
In 2019, the financial penalty was removed with the Tax Cuts and Jobs Act. People could opt out of health insurance without fear of encountering a penalty; and with no federal mandate in place, health insurance costs started to skyrocket.
The individual mandate in California was announced in 2019 when Governor Gavin Newsom and other advocates revealed their plans for the Act. Similar to Obamacare, the Act aimed to give more people the healthcare coverage they needed while lowering the overall cost of healthcare for everyone in the state.
The individual mandate was voted upon by state legislators in June 2019 and Governor Newsom signed it into law in July of the same year.
Health Insurance Tax Penalties In CA
January 2021 marked the first time since the end of the Obamacare penalty that individuals will be penalized in California for not having health insurance. Individuals who receive a W-2 will discover a penalty on their form if they did not have an insurance in 2020.
There may be some exceptions to this rule in California, including households where the income level falls below the threshold for state tax filing. The California Individual Shared Responsibility Penalty is either 2.5% of gross household income exceeding California’s filing threshold or a flat penalty per family member ($800 per adult and $400 per child in 2021).
You can estimate your potential penalty here.
Ways To Avoid An Insurance Penalty
Individuals have two main options when it comes to health insurance in California to avoid penalties. These include:
1. Enroll In A Qualified Health Plan
Enrolling in a qualified health insurance plan is the best way to avoid penalties at tax time. Individuals have the option to purchase short-term health insurance or to sign up for a policy if they have a qualifying life event. Penalties will be reduced for each month that a person has insurance as they are calculated on a month-to-month basis. The more months that a person goes without health insurance, the higher the penalty.
Individuals who have health insurance should start preparing now for the 2021 tax season by gathering their health insurance coverage documents, such as Forms 1095-A, 1095-B, or 1095-C, which should arrive in the mail. Employees who receive healthcare coverage from their employer should receive a statement that indicates that they were covered for part of the year or the whole year.
2. Apply For An Insurance Exemption
There are some circumstances in which a person may be found exempt from having to pay a tax penalty. Some of these allowable exceptions include:
- If coverage is proven to be unaffordable.
- If a person has a short coverage gap, meaning that they are uninsured for less than three consecutive months during the year.
- If a person’s income is lower than the state threshold for filing taxes, which usually means that they are not required to file taxes or pay penalties for not having health insurance coverage.
- If a person was incarcerated.
- If a person is a member of an Indian tribe.
- If a person experienced a general hardship, such as eviction, foreclosure, homelessness, unpaid medical bills, death of a close family member, or domestic violence.
- If a person is a member of a certain religious sect.
Contact The Experts At New City Insurance
Tax penalties can come as a surprise for people who are not familiar with the 2020 changes to California health insurance coverage. To learn more about the tax penalty for not having health insurance in California or to request a consultation with an insurance professional, contact New City Insurance.