Trump's Executive Order on Obamacare Leads to a Big Tax Change

By Sean Williams Markets Fool.com

Five weeks ago, Donald Trump was inaugurated as the 45th President of the United States, and not long thereafter he signed his first executive order -- which happened to pertain to the Affordable Care Act, known better as Obamacare.

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Trump's first order of business

Repealing and replacing Obamacare has been a linchpin of Trump's campaign, but getting a clean repeal of Obamacare probably isn't going to be so easy. When Obamacare was signed into law in March 2010, it had 60 Senate votes in favor its passage. In order to repeal Obamacare in its entirety, 60 votes will once again be needed. This means swaying Democrats to join the Republican majority's cause, which won't be easy.

Image source: Getty Images.

Understanding that he has a potentially long road ahead, Trump chose to exercise what power he had as president to "minimize the unwarranted economic and regulatory burdens" of Obamacare. The executive order, dated Jan. 20, 2017, allows government agencies, "to the maximum extent permitted by law... to waive, defer, grant exemption from, or delay the implementation of any provision or requirement of the Act [Affordable Care Act] that would impose a fiscal burden on any State or a cast, 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."

At the time Trump signed this executive order, it wasn't entirely clear what scope of power this statement held. In other words, the ACA was still very much in place, and Republicans hadn't presented a replacement plan. However, a few weeks later we now know one of the major implications of Trump's first executive order.

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This executive order is leading to a major tax change

Some of the more disliked, but critical, components of Obamacare are the individual mandate and associated Shared Responsibility Payment (SRP). The individual mandate is the actionable component of Obamacare requiring all persons to buy health insurance or face penalties come tax time. That penalty is the SRP, which in 2016 is the greater of $695 or 2.5% of a person's modified adjusted gross income. Estimates from the Kaiser Family Foundation predict that the average household SRP in 2016 will be $969.

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In 2014 and 2015, the Internal Revenue Service (IRS) provided leniency to those individuals who failed to include proof of their health coverage during the previous year. However, the IRS had made it clear that any Form 1040s (the standard tax form) filed for the 2016 calendar tax year without line 61 filled in -- the line that would demonstrate to the IRS if you had health coverage or paid the SRP -- would be rejected.

But Trump's executive order changed everything.

According to Yahoo Finance, the IRS will once again be accepting electronic and paper tax returns for calendar year 2016 without line 61 filled in.

Now here's where things get tricky. On one hand, the ACA is still the health law of the land, even if it seems to be living on borrowed time. This means the individual mandate is still law, and those who choose not to purchase health insurance should be paying the SRP, unless they're exempt. On the other hand, without line 61 filled in, the IRS has no guarantee that the taxpayer paid the SRP or was even insured in 2016.

The IRS has suggested that if it has a question about a particular tax return it'll follow up with those taxpayers after the filing process is over. However, the IRS has also previously said that it wouldn't garnish wages or go after a person's property for not paying the SRP. In effect, Trump's executive order has made it nearly impossible for the IRS to collect the SRP or to concretely verify an individuals' health insurance status.

That's a pretty big deal.

Image source: Getty Images.

More changes are likely on the way

As we look ahead, more tax changes may be on the docket for your 2017 calendar year taxes.

With a clean repeal looking unlikely at the moment, Congressional Republicans may turn to a process known as reconciliation, which would allow them to repeal the components of Obamacare that impact the federal budget. In order for a reconciliation bill to pass the Senate, a majority of 51 votes is all that would be needed, and Republicans voting along party lines can reach this total. Reconciliation would eliminate Obamacare's subsidies, as well as the Shared Responsibility Payment, which would certainly impact how tens of millions of Americans prepare their taxes.

Obamacare's end appears imminent. The big question for the insured and taxpayers at this point is simply "when?"

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