A tax guide to Obamacare / What taxpayers and tax professionals need to know about the health law

Eva Rosenberg, MarketWatch writes:  President Obama delayed the implementation of part of the Health Care Act last week. Employers with over 50 employees can now wait until 2015 to provide health care coverage for their employees. This announcement was dissected ad nauseum on all the Sunday morning news programs. As some tax professionals have wondered how to advise their clients on this issue as well as other murky aspects of the new law, here’s help.

What penalties will not be waived for 2014?

The penalties assessed against individuals who are required to have medical coverage but don’t have it will kick in as planned.

In a recent Tax Talk Today program about the Affordable Care Act, enrolled agents John Sheely and Ben Tallman both point out that the penalty for individuals not carrying insurance is a minimum of $95 per person or 1% of their household income in 2014, whichever is higher. (See transcript .) The penalty, which tops out at three people per family, increases each year. It rises to 2% in 2015, and 2.5% in 2016 — then increases based on a cost of living index.

What does “household income” mean?

This isn’t the usual thing we see on tax return computations, like adjusted gross income (AGI) or modified adjusted gross income (MAGI). (See Modified Adjusted Gross Income Computation.) Household income includes the modified adjusted gross income of your dependents — if they are required to file a tax return. (Click here to learn more.)

In plain English?

Suppose your children have summer jobs, or are working their way through college, but still qualify as your dependents. You will add their wages or freelance profits to your household income. If you don’t have insurance coverage on them, yourself and/or your spouse, your penalty will be based on the total of everyone’s income.

Danger of getting caught

How will the IRS know who is responsible for these penalties? After all, the mechanism isn’t in place for employers to provide information about their employees to the IRS. And the reporting requirement has been delayed until 2015. There really is no way for the IRS to enforce this provision.

Meanwhile, Congress is still trying to change and redefine the law before it all goes into effect.

Who doesn’t need to worry?

Tallman explains that many groups and individuals are exempt from the individual mandate. Those would include certain recognized religious groups, like the Amish. Nonresident aliens and noncitizens are exempt, as are incarcerated individuals, and Native Americans from a federally recognized tribe. Persons living outside of the U.S. at the time would be exempt from the mandate, as well as Medicare and Medicaid recipients. Also, if people have hardship cases they can take them before the IRS and ask to be exempted.

In addition, if the cost of your coverage is higher than 8% of your household income, you are exempt from coverage for that given month. Naturally, if your costs are too high for the whole year, you are exempt from paying for insurance coverage all year.

To see if you are affected next year, you can find more information on the IRS’s Q&A page.

What to do?

What should tax professionals and financial advisers do? How can they advise their clients about these contradictory laws and enforcement activities?

The general consensus in the NAEA LinkedIn Forum is: The smart tax adviser will not advise, but rather inform clients about the costs and penalties of not carrying insurance in 2014 and beyond -- and about tax credits available for some insurance premiums.

The final decisions will be up to the taxpayer.