Tax Prep Dispatch: You Can't Afford to Overlook Affordability!

This issue of the Dispatch was written by guest author Brad Martin. Brad is the VITA Program Coordinator for the United Way of Southwest Alabama, a member of the TON steering committee, a frequent contributor to the Tax Roundtable listserv and a participant in the TON Quality Assurance Working Group. 

We've all come face to face with taxpayers who didn't have health insurance at some point during the year and are looking at a potential penalty: the shared responsibility payment. Tax preparers are currently struggling with this issue on 2017 returns and will encounter it again next year during the 2019 filing season. The repeal of the requirement to have health insurance and the resulting penalty will not go into effect until tax year 2019.

Once we realize that someone on the return did not have insurance all year, we begin the process of figuring out if they can claim some sort of exemption from the health insurance mandate. It often goes something like this:

  • Is their household or gross income below the filing threshold? Nope.
  • Did they have a short gap in coverage? Nope, they had no coverage for three or more months of the year.
  • Did they live in a state that didn't expand Medicaid? Yep, but their income was $350 above 138% of FPL so they don’t qualify for exemption code G,Medicaid coverage gap (more about this later).
  • Were they incarcerated? Nope.
  • Did they have an ITIN? Nope, they all have social security numbers.

And so it goes until we find there's almost nothing left—except the exemption "coverage considered unaffordable," also known as the “affordability exemption."

Gadzooks, not the dreaded affordability exemption! It’s dreaded because it's time consuming, the outcome is difficult to predict, it’s so very complex and we don't like to look like we don't know what we're doing in front of the taxpayer. It's easier – and probably pretty common – to pretend we never heard of the affordability exemption and let the chips fall where they may. But, of course, we must figure out how to use this exemption because when it's effective, it can save taxpayers hundreds or even thousands of dollars.

The Basics

This one Dispatch can't possibly offer a full treatment of the affordability exemption. There is training available for that, including the ACA lesson in Publication 4491, VITA/TCE Training Guide, and webinars from the Center on Budget & Policy Priorities' (CBPP) "Health Reform Beyond the Basics" project.

But to hit the high points:

  • The affordability exemption may apply if available insurance was not affordable, based on the government’s definition of affordable. That means the cost of coverage for one or more people on the tax return would have been more than 8.16% of household income. That's a really generalized explanation, and there are lots of definitions and rules and exceptions and caveats.
  • Even in a household with multiple uninsured people, you have to examine each person's situation separately. Affordability is not an exemption you can automatically apply to everyone in the household.
  • Similarly, the affordability exemption does not necessarily apply to the entire tax year. Circumstances can change during the year. It's possible that you may have to make multiple affordability calculations for a taxpayer depending on life changes such as the loss of employer-sponsored insurance for one person, or another person becoming eligible for Medicare halfway through the year.

The Process

Gather the insurance information before you touch the computer. It's important to have a firm grasp of your taxpayer's entire tax household's health insurance situation:

  • Use Form 13614-C, Intake Interview & Quality Review Sheet, to make careful notations about who had coverage and when. If you're aiming for an affordability exemption, make sure you know what kind of coverage each person had. Was it employer-sponsored coverage (coverage through someone's job), government coverage outside the Marketplace or exchanges (such as Medicare, Medicaid, CHIP or Tricare), private insurance outside the exchanges or Marketplace/Exchange-provided coverage? All of that really matters.
  • If you're trying for the affordability exemption, you also need to get really clear about the offers of coverage that each person had available to them. Did the person have an offer of self-only coverage from their employer? If not, what about an offer of insurance coverage from a family member's employer? Were they eligible for Medicaid? Or was the only option to select an exchange-based plan?
  • Did your taxpayer live in a state that expanded Medicaid? The answer to this question may affect how many people you can include in some of your affordability calculations (more on figuring this out later).
  • Did your taxpayer's state use as its marketplace or did it establish its own exchange? The answer to this question determines where you should go to find some of the information you will need to make your calculations.

Prepare the rest of the tax return before you begin consideration of the affordability exemption:

  • You need a complete picture of the taxpayer's income, filing status and dependent situation before you can determine exemptions.
  • In many cases, you may be able to find an easier-to-obtain exemption for the taxpayer once you have a complete understanding of the taxpayer's financial picture.

Know the links to useful tools that make addressing the affordability exemption a practical possibility:

  • For a 2017 return, the favorite is the one developed by the Health Reform Beyond the Basics project at the CBPP. This tool offers common sense, easy to understand guidance. It will refer you to proper locations for finding the information you need, and it customizes its guidance and calculations based on the state in which your taxpayer lives. So it knows if your state expanded Medicaid and it does the calculation to determine if the taxpayer qualifies for the code G exemption. Find it at or use the shortened link that I created:
  • If you want something with more bells and whistles, another good tool – particularly if you need to address a prior tax year – is provided by Colorado Tax Aide at:, which I've long since shortened to

Example Scenario

This example exercise employs the first tool I mentioned from CBPP. For this family, none of the easy exemptions apply so you’re going for the affordability exemption. Good luck!

Here’s the taxpayer information:

  • Adam and April Anderson are filing a 2017 joint return.
  • Adam was born February 2, 1972.
  • April was born March 3, 1973.
  • They have a dependent son, Brian Anderson, who was born October 10, 2000.
  • Neither Adam nor April had any health insurance in 2017.
  • Brian was covered by CHIP for all of 2017.
  • Adam's employer did offer him a self-only policy that would have cost the family $230 per month, but Adam turned it down saying they couldn't afford the expense. Adam's employer did not offer family coverage.
  • April's employer did not offer any health insurance.
  • They lived in zip code 36460 (Monroe County, Alabama) for all of 2017.
  • Alabama did not expand Medicaid.
  • Adam's W-2 shows wages of $25,000 and tax withheld of $2,500.
  • April's W-2 shows wages of $26,000 and tax withheld of $2,600.
  • They had no other income for 2017 and Brian was not required to file a tax return.

Here’s how to use the CBPP tool:

  • State: Alabama
  • Filing status: MFJ
  • Number of people: 3
  • Adjusted gross income: $51,000 (no income for dependent)
  • They had no tax-exempt interest, social security, taxable social security, foreign income or pre-tax deductions for employer-sponsored coverage.

At this point, the tool shows us the total household income is $51,000 so we can't use the income below filing threshold exemption. Next, the tool addresses the code G exemption (Medicaid coverage gap) and finds that it does not apply. Alabama did not expand Medicaid. If they were in an expansion state, the code G exemption would not be possible and this last calculation would not appear.

Now that we've laid the groundwork, it’s time to test for affordability using the CBPP tool, one person at a time:

Starting with Adam:

  • Does the taxpayer (or spouse) have an offer of self-only coverage from his or her own employer? If yes, determine the offer's affordability and STOP for this individual.

Yes: Adam has an offer of self-only coverage that would have cost him $230 per month. Notice that the tool asks you for a monthly plan cost, and calculates the annualized premium amount for you. You need the annualized amount later to use with TaxSlayer, because it has to be compared with annual income, so be sure you note the annual cost, which in this case is $2760. Our tool now tells us that Adam's cost is considered affordable and Code A does not apply. Bummer for Adam. April did not have an offer of self-only coverage, so we leave the spouse entry blank.

Continuing with the next question:

  • Does anyone have an offer of family coverage from an employer? If yes, determine the offer's affordability and STOP for this individual.

No. If the answer had been Yes, you would complete the amounts as you did in the last step. But since that's not the case, move on to question 3.

  • If there is no employer offer, is the cost of marketplace coverage unaffordable?

This is April's only option, and so begins the longest part of this exercise.

To complete the next section, we need the lowest-cost bronze plan amount and the second lowest-cost silver plan amount. The tool advises you on the best place to obtain the information, and it helps you determine who to include in the calculation if you need the guidance. For this example, the taxpayers live in Alabama, so we need the tax tool to obtain the bronze and silver premium costs.

Note that the tool does a good job of capturing the people you need to include for the bronze and silver plan calculations if you read the questions carefully. Remember to include everyone in the tax household, even if they have insurance. The box below shows how we answered the questions asked at, and then we'll come back and finish our original screen.

Now you temporarily leave the CBPP tool and go to to get the information you need to enter into the CBPP tool. If your state runs its own marketplace, you’ll need to go there for this information. The CBPP tool will tell you where to go and give you tips on using your state’s tool.

What Happens on

  • Click on get started (claim an affordability exemption)
  • Choose a tax year: 2017 [continue]
  • How many people: 3
  • Primary Taxpayer name: Adam
  • Person 2 and relationship: April, Spouse
  • Person 3 and relationship: Brian, Son/Daughter [continue]

First, for Adam:

  • Date of Birth, 2/2/1972.
  • Does not use tobacco.
  • Lived in 36460 Monroe Co. all year. [continue]
  • Adam is eligible for employer sponsored coverage all year, even though he did not take it. Select all months in the first section.
  • You skip over the next section because he was not eligible for insurance outside the Marketplace. In fact, the system knows this and has disabled this section. [continue]

Next, for April:

  • Date of Birth, 3/3/1973.
  • Does not use tobacco.
  • Same location as Adam. [continue]
  • April was not eligible for employer sponsored coverage or another exemption, so we leave the first set of boxes unchecked.
  • She was also not eligible for government coverage outside the Marketplace, so we leave the second set of boxes unchecked also. If you’re unsure whether April would have qualified for Medicaid, go back to the CBPP tool and look at the instructions for Line 10 of the affordability worksheet, which will spell out Medicaid eligibility levels in your state.  [continue]

Finally, for Brian:

  • Date of birth, 10/10/2000.
  • Does not use tobacco.
  • Same location. [continue]
  • Brian was not eligible for employer sponsored coverage or another exemption, so we leave the first set of months unchecked. But he was eligible for Medicaid all year, so we check all months in the second set. Then continue.

Review your information for accuracy, then continue and note your results. Notice that the Silver Plan amount is listed first, followed by the Bronze Plan. Keep the amounts straight.

If you entered the information correctly, you found that the lowest-cost bronze plan (LCBP) is $502.74 per month, and the second lowest-cost silver plan (SLCSP) is $475.72.

Now let's go back to the CBPP tool and enter the LCBP and SLCSP figures. When you plug in the values, you see that for anyone who is relying on Marketplace coverage, in this case April, coverage is considered unaffordable.

Outcome: Adam's coverage offer would have been affordable, therefore, no exemption for him. April's coverage is unaffordable, so she gets an exemption for the whole year. Brian has no need for an exemption. There will be a shared responsibility payment penalty for Adam, but no penalty for April or Brian.

You are now finished with the CBPP tool and can move on to finishing the tax return. Remember the tax return?

Note to TaxWise users: The next section does not apply to you. Once you have determined that a taxpayer qualifies for the affordability exemption, just complete Form 8965, Health Coverage Exemptions. Enter the name, SSN, exemption code A and the applicable months, for each person that has the exemption. For our example return, the preparer would enter April’s name and SSN, code A, and check the box for full year. If Form 8965 is not appearing in the TaxWise tree, it means you need to go back to the ACA worksheet and answer “Yes” to the second question, “Was the taxpayer, spouse, or any dependent granted a Marketplace exemption or do you want to apply for any of the exemptions allowed on Form 8965?”

Here’s how to finish the return using TaxSlayer software:

  • Did you or your family have health insurance at any time in 2017? Yes.
  • Did you purchase health insurance via or a State Marketplace? No.
  • Was your entire household insured for all 12 months of 2017? No.
  • Adam: 0 months; April: 0 months; Brian: 12 months.
  • There are no premiums paid through a salary reduction, because nobody had employer-sponsored coverage. Brian did not have a filing requirement, so there's no dependent income. Nothing is entered on the Household Income page.
  • They don't qualify for any exemptions, other than Affordability.
  • Did you qualify for an exemption due to circumstances or receive an exemption certificate from the marketplace? No.
  • Would you like to determine if you qualify for an exemption due to unaffordable premiums? Yes, please!
  • At this point, we need our LCBP and SLCSP plan amounts. We enter them and click Continue.

Now we have to complete an affordability worksheet for each person who needs an exemption – whether they qualify or not:

  • We start with Adam: Enter the required annualized contribution for each month that applies to this individual. His employer offered him coverage at a cost of $230 per month. The annualized figure is $2760 ($230 X 12), so we enter that figure into each month we need an exemption. Yes, use the annual figure for each month which means that in this case, you enter $2,760 12 times!
  • For April, no insurance was offered so the first two items do not apply. We enter the amount from the Marketplace Coverage Affordability Worksheet. ($4,548) This was calculated by TaxSlayer based on the bronze and silver figures that we entered. Again, this is an annualized figure, and yes, you enter $4,548 12 times!

Next, TaxSlayer should say: "Based on the information calculated using the Affordability Worksheet, you qualify to claim the Coverage is Considered Unaffordable exemption. This exemption has been automatically applied to the appropriate months for the applicable household members on the return."

And if you look at your return summary, you will see that it worked. There's still a Shared Responsibility Payment, because we were unable to get Adam an exemption. But we did get one for April, and that means we reduced their SRP from $1,390 to $755. That's a $635 difference, and what taxpayer wouldn't be grateful to you for taking the time to make that happen?


I know it's a long and drawn-out process. And it can be even more complex for someone who changes jobs or when someone is added to or leaves the household during the year. Here’s a summary of the process for most situations:

  1. Gather all the insurance information.
  2. Prepare the rest of the tax return.
  3. Go to CBPP online tool.
  4. Go to or (or state-specific link) to determine applicable costs.
  5. Go back to CBPP online tool.
  6. Complete the health insurance section of the tax return.

Inevitably the affordability exemption issue comes up when the waiting room is crowded and it's lunch time and your taxpayers' twins are whining because they want to go to McDonald's. But you can see why the affordability exemption is important. I usually ask my client, "Are you in a rush? I'm going to try something. I'm not sure if it will work or not, and we won't know until we try. But if it does work, it could save you quite a bit of money. Can you give me a few extra minutes?" Usually they're happy to wait. For this reason, I've become very passionate about the fact that I can't afford to overlook affordability and neither can you.

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