What Is the Affordable Care Act (ACA)?

The Affordable Care Act (ACA) is the comprehensive healthcare reform signed into law by then-President Barack Obama in March 2010. Formally known as the Patient Protection and Affordable Care Act and commonly referred to as Obamacare, the law includes a list of healthcare policies intended to expand access to health insurance to millions of uninsured Americans.

The law expanded Medicaid eligibility, created health insurance exchanges, mandated that Americans purchase or otherwise obtain health insurance, and prohibited insurance companies from denying coverage due to preexisting conditions.

Understanding the Affordable Care Act (ACA)

The ACA was designed to reform the health insurance industry and help reduce the cost of health insurance coverage for individuals who qualify. The law includes premium tax credits and cost-sharing reductions to help lower expenses for lower-income individuals and families.

The ACA requires most insurance plans, including those sold on the Health Insurance Marketplace, to cover a list of preventive services at no cost to policyholders that include checkups, patient counseling, immunizations, and numerous health screenings.

All ACA-compliant health insurance plans must cover specific “essential health benefits,” such as emergency services, family planning, maternity care, hospitalization, prescription medications, mental health services, and pediatric care.

The law allows states to extend Medicaid coverage to a wider range of people. As of September 2022, 39 states and the District of Columbia had exercised that option.

Every year, there is an open enrollment period on the Health Insurance Marketplace during which people can buy or switch insurance plans. Enrollment outside of the open season is allowed only for those whose circumstances change, such as marrying, divorcing, becoming a parent, or losing a job that provided health insurance coverage.

Key Features of the Affordable Care Act

Provisions included in the ACA expand access to insurance, increase consumer protections, emphasize prevention and wellness, improve quality and system performance, expand the health workforce, and curb rising healthcare costs.

Expand Access to Insurance

The ACA requires employers to cover their workers and provides tax credits to certain small businesses that cover specified costs of health insurance for their employees. It created state- or multistate-based insurance exchanges to help individuals and small businesses purchase insurance. 

The law expanded Medicaid coverage for low-income individuals and allows young adults to remain on parents’ policies until age 26.

Part of the ACA until 2017 was the individual mandate, a provision requiring all Americans to have healthcare coverage, either from an employer or through the ACA or another source, or face tax penalties.

Increase Consumer Insurance Protections

The ACA prohibits lifetime monetary caps on insurance coverage, limits the use of annual caps, and establishes state rate reviews for insurance premium increases. It prohibits insurance plans from excluding coverage for children with preexisting conditions and canceling or rescinding coverage.

Prevention and Wellness

The Prevention and Public Health Fund, established under the ACA, provides grants to states for prevention activities, such as disease screenings and immunizations, and the National Prevention, Health Promotion, and Public Health Council addresses tobacco use, physical inactivity, and poor nutrition.

The ACA requires insurance plans to cover preventive care such as immunizations; preventive care for children; screening for certain adults for conditions such as high blood pressure, high cholesterol, diabetes, and cancer; and a public education campaign for oral health.

Improve Health Quality and Curb Costs

The ACA requested investments in health information technology. It addressed guidelines to reduce medical errors and create payment mechanisms to improve efficiency and results and improve care coordination among providers.

The law requires oversight of health insurance premiums and practices, reducing healthcare fraud and uncompensated care to foster comparison shopping in insurance exchanges to increase competition and price transparency.

Pros and Cons of the Affordable Care Act

Updates to the Affordable Care Act

With his election in 2016, then-President Donald Trump launched efforts to repeal and replace the ACA, stating that the United States should delay “the implementation of any provision or requirement of the [Patient Protection and Affordable Care] Act that would impose a fiscal burden on any State.”

In December 2017, the Tax Cuts and Jobs Act (TCJA) removed the penalty for individuals not having health insurance and substantially scaled back the outreach program to help Americans sign up for the ACA, cutting the enrollment period in half. By 2018, the number of Americans covered under the ACA had dropped to 13.8 million from 17.4 million in 2015, according to a report from the Kaiser Family Foundation, a healthcare research organization.

In 2021, President Biden signed an executive order to focus on the “rules and other policies that limit Americans’ access to health care,” prompting federal agencies to examine five areas, including preexisting conditions, policies undermining the Health Insurance Marketplace, enrollment roadblocks, and affordability. COVID-19 relief legislation, the American Rescue Plan Act (ARPA), extended eligibility for ACA health insurance subsidies to those buying their health coverage on the Marketplace with incomes over 400% of poverty.

With the passage of the Inflation Reduction Act, signed into law by Biden on Aug. 16, 2022, financial assistance was extended for people enrolled in the ACA through 2025 instead of 2022. It also expands eligibility, allowing more middle-class citizens to receive premium assistance. The legislation passed in both the House of Representatives and the Senate.

The Bottom Line

The Patient Protection and Affordable Care Act (ACA) was passed in 2010 and is commonly known as Obamacare. It extended healthcare coverage to millions of previously uninsured Americans. The ACA launched the Health Insurance Marketplace, through which eligible people may find and buy health insurance policies.

All ACA-compliant health insurance plans, including those sold through the Marketplace, must cover several essential health benefits. The ACA has continued to evolve through three presidencies.

What Is Austerity?

The term austerity refers to a set of economic policies that a government implements in order to control public sector debt. Governments put austerity measures in place when their public debt is so large that the risk of default or the inability to service the required payments on its obligations becomes a real possibility.

In short, austerity helps bring financial health back to governments. Default risk can spiral out of control quickly and, as an individual, company, or country slips further into debt, lenders will charge a higher rate of return for future loans, making it more difficult for the borrower to raise capital.

How Austerity Works

Governments experience financial instability when their debt outweighs the amount of revenue they receive, resulting in large budget deficits. Debt levels generally increase when government spending increases. As mentioned above, this means that there is a greater chance that federal governments can default on their debts. Creditors, in turn, demand higher interest to avoid the risk of default on these debts. In order to satisfy their creditors and control their debt levels, they may have to take certain measures.

Austerity only takes place when this gap—between government receipts and government expenditures—shrinks. This situation occurs when governments spend too much or when they take on too much debt. As such, a government may need to consider austerity measures when it owes more money to its creditors than it receives in revenues. Implementing these measures helps put confidence back into the economy while helping restore some semblance of balance to government budgets.

Austerity measures indicate that governments are willing to take steps to bring some degree of financial health back to their budgets. As a result, creditors may be willing to lower interest rates on debt when austerity measures are in place. But there may be certain conditions on these moves.

For instance, interest rates on Greek debt fell following its first bailout. However, the gains were limited to the government having decreased interest rate expenses. Although the private sector was unable to benefit, the major beneficiaries of lower rates are large corporations. Consumers benefited only marginally from lower rates, but the lack of sustainable economic growth kept borrowing at depressed levels despite the lower rates.

Special Considerations

A reduction in government spending doesn’t simply equate to austerity. In fact, governments may need to implement these measures during certain cycles of the economy.

For example, the global economic downturn that began in 2008 left many governments with reduced tax revenues and exposed what some believed were unsustainable spending levels. Several European countries, including the United Kingdom, Greece, and Spain, turned to austerity as a way to alleviate budget concerns.

Austerity became almost imperative during the global recession in Europe, where eurozone members didn’t have the ability to address mounting debts by printing their own currency. Thus, as their default risk increased, creditors put pressure on certain European countries to aggressively tackle spending.

Types of Austerity

Broadly speaking, there are three primary types of austerity measures:

• Generating revenue generation through higher taxes. This method often supports more government spending. The goal is to stimulate growth with spending and capturing benefits through taxation.
• The Angela Merkel model. Named after the German chancellor, this measure focuses on raising taxes while cutting nonessential government functions.
• Lower taxes and lower government spending. This is the preferred method of free-market advocates.

Taxes

There is some disagreement among economists about the effect of tax policy on the government budget. Former Ronald Reagan adviser Arthur Laffer famously argued that strategically cutting taxes would spur economic activity, paradoxically leading to more revenue.

Still, most economists and policy analysts agree that raising taxes will raise revenues. This was the tactic that many European countries took. For example, Greece increased value-added tax (VAT) rates to 23% in 2010. The government raised income tax rates on upper-income scales, along with adding new property taxes.

Reducing Government Spending

The opposite austerity measure is reducing government spending. Most consider this to be a more efficient means of reducing the deficit. New taxes mean new revenue for politicians, who are inclined to spend it on constituents.

Spending takes many forms, including grants, subsidies, wealth redistribution, entitlement programs, paying for government services, providing for the national defense, benefits to government employees, and foreign aid. Any reduction in spending is a de facto austerity measure.

At its simplest, an austerity program that is usually enacted by legislation may include one or more of the following measures:

• A cut or a freeze—without raises—of government salaries and benefits
• A freeze on government hiring and layoffs of government workers
• A reduction or elimination of government services, temporarily or permanently
• Government pension cuts and pension reform
• Interest on newly issued government securities may be cut, making these investments less attractive to investors, but reducing government interest obligations
• Cuts to previously planned government spending programs such as infrastructure construction and repair, health care, and veterans’ benefits
• An increase in taxes, including income, corporate, property, sales, and capital gains taxes
• A reduction or increase in the money supply and interest rates by the Federal Reserve as circumstances dictate to resolve the crisis.
• Rationing of critical commodities, travel restrictions, price freezes, and other economic controls, particularly in times of war

Criticism of Austerity

The effectiveness of austerity remains a matter of sharp debate. While supporters argue that massive deficits can suffocate the broader economy, thereby limiting tax revenue, opponents believe that government programs are the only way to make up for reduced personal consumption during a recession. Cutting government spending, many believe, leads to large-scale unemployment. Robust public sector spending, they suggest, reduces unemployment and therefore increases the number of income-tax payers. 

Economists such as John Maynard Keynes, a British thinker who fathered the school of Keynesian economics, believe that it is the role of governments to increase spending during a recession to replace falling private demand. The logic is that if demand is not propped up and stabilized by the government, unemployment will continue to rise and the economic recession will be prolonged.

But austerity runs contradictory to certain schools of economic thought that have been prominent since the Great Depression. In an economic downturn, falling private income reduces the amount of tax revenue that a government generates. Likewise, government coffers fill up with tax revenue during an economic boom. The irony is that public expenditures, such as unemployment benefits, are needed more during a recession than a boom.

Examples of Austerity

United States

Perhaps the most successful model of austerity, at least in response to a recession, occurred in the United States between 1920 and 1921. The unemployment rate in the U.S. economy jumped from 4% to almost 12%. Real gross national product (GNP) declined almost 20%—greater than any single year during the Great Depression or Great Recession.

President Warren G. Harding responded by cutting the federal budget by almost 50%. Tax rates were reduced for all income groups, and the debt dropped by more than 30%. In a speech in 1920, Harding declared that his administration “will attempt intelligent and courageous deflation, and strike at government borrowing…[and] will attack high cost of government with every energy and facility.”

Greece

In exchange for bailouts, the EU and European Central Bank (ECB) embarked on an austerity program that sought to bring Greece’s finances under control. The program cut public spending and increased taxes often at the expense of Greece’s public workers and was very unpopular. Greece’s deficit has dramatically decreased, but the country’s austerity program has been a disaster in terms of healing the economy.

Mainly, austerity measures have failed to improve the financial situation in Greece because the country is struggling with a lack of aggregate demand. It is inevitable that aggregate demand declines with austerity. Structurally, Greece is a country of small businesses rather than large corporations, so it benefits less from the principles of austerity, such as lower interest rates. These small companies do not benefit from a weakened currency, as they are unable to become exporters.

While most of the world followed the financial crisis in 2008 with years of lackluster growth and rising asset prices, Greece has been mired in its own depression. Greece’s gross domestic product (GDP) in 2010 was $299.36 billion. In 2014, its GDP was $235.57 billion according to the United Nations. This is staggering destruction in the country’s economic fortunes, akin to the Great Depression in the United States in the 1930s.

Greece’s problems began following the Great Recession, as the country was spending too much money relative to tax collection. As the country’s finances spiraled out of control and interest rates on sovereign debt exploded higher, the country was forced to seek bailouts or default on its debt. Default carried the risk of a full-blown financial crisis with a complete collapse of the banking system. It would also be likely to lead to an exit from the euro and the European Union.

What Is the 183-Day Rule?

The 183-day rule is used by most countries to determine if someone should be considered a resident for tax purposes. In the U.S., the Internal Revenue Service (IRS) uses 183 days as a threshold in the “substantial presence test,” which determines whether people who are neither U.S. citizens nor permanent residents should still be considered residents for taxation.

Understanding the 183-Day Rule

The 183rd day of the year marks a majority of the days in a year, and for this reason countries around the world use the 183-day threshold to broadly determine whether to tax someone as a resident. These include Canada, Australia, and the United Kingdom, for example. Generally, this means that if you spent 183 days or more in the country during a given year, you are considered a tax resident for that year.

Each nation subject to the 183-day rule has its own criteria for considering someone a tax resident. For example, some use the calendar year for its accounting period, whereas some use a fiscal year. Some include the day the person arrives in their country in their count, while some do not.

Some countries have even lower thresholds for residency. For example, Switzerland considers you a tax resident if you have spent more than 90 days there.

The IRS and the 183-Day Rule

The IRS uses a more complicated formula to reach 183 days and determine whether someone passes the substantial presence test. To pass the test, and thus be subject to U.S. taxes, the person in question must:

• Have been physically present at least 31 days during the current year and;
• Present 183 days during the three-year period that includes the current year and the two years immediately preceding it.

Those days are counted as:

• All of the days they were present during the current year
• One-third of the days they were present during the previous year
• One-sixth of the days present two years previously

Other IRS Terms and Conditions

The IRS generally considers someone to have been present in the U.S. on a given day if they spent any part of a day there. But there are some exceptions.

Days that do not count as days of presence include:

• Days that you commute to work in the U.S. from a residence in Canada or Mexico if you do so regularly
• Days you are in the U.S. for less than 24 hours while in transit between two other countries
• Days you are in the U.S. as a crew member of a foreign vessel
• Days you are unable to leave the U.S. because of a medical condition that develops while you are there
• Days in which you qualify as exempt, which includes foreign-government-related persons under an A or G visa, teachers and trainees under a J or Q visa; a student under an F, J, M, or Q visa; and a professional athlete competing for charity

U.S. Citizens and Resident Aliens

Strictly speaking, the 183-day rule does not apply to U.S. citizens and permanent residents. U.S. citizens are required to file tax returns regardless of their country of residence or the source of their income.

However, they may exclude at least part of their overseas earned income (up to $108,700 in 2021) from taxation provided they meet a physical presence test in the foreign country and paid taxes there. To meet the physical presence test, the person needs to be present in the country for 330 complete days in 12 consecutive months.

U.S. Tax Treaties and Double Taxation

The U.S. has tax treaties with other countries to determine jurisdiction for income tax purposes and to avoid double taxation of their citizens. These agreements contain provisions for the resolution of conflicting claims of residence.

Residents of these partner nations are taxed at a lower rate and may be exempt from U.S. taxes for certain types of income earned in the U.S. Residents and citizens of the U.S. are also taxed at a reduced rate and may be exempt from foreign taxes for certain income earned in other countries. It is important to note that some states do not honor these tax treaties.

183 Day Rule FAQs 

How Many Days Can You Be in the U.S. Without Paying Taxes?

The IRS considers you a U.S. resident if you were physically present in the U.S. on at least 31 days of the current year and 183 days during a three-year period. The three-year period consists of the current year and the prior two years. The 183-day rule includes all the days present in the current year, 1/3 of the days you were present in year 2, and 1/6 of the days you were present in year 1.

How Long Do You Have to Live in a State Before You’re Considered a Resident?

Many states use the 183-day rule to determine residency for tax purposes, and what constitutes a day varies among states. For instance, any time spent in New York, except for travel to destinations outside of New York (e.g., airport travel), is considered a day. So, if you work in Manhattan but live in New Jersey, you may still be considered a New York resident for tax purposes even if you never spend one night there.

It is important to consult the laws of each state that you frequent to determine if you are required to pay their income taxes. Also, some states have special agreements whereby a resident who works in another state is only required to pay taxes in the state of their permanent residence—where they are domiciled.

How Do I Calculate the 183-Day Rule?

For most countries that apply this rule, you are a tax resident of that country if you spend 183 or more there. The United States, however, has additional criteria for applying the 183-rule. If you were physically present in the U.S. on at least 31 days of the current year and 183 days during a three-year period, you are a U.S. resident for tax purposes. Additional stipulations apply to the three-year threshold.

How Do I Know if I Am a Resident for Tax Purposes?

If you meet the IRS criteria for being qualified as a resident for tax purposes and none of the qualified exceptions apply, you are a U.S. resident. You are a tax resident if you were physically present in the U.S. for 31 days of the current year and 183 days in the last three years, including the days present in the current year, 1/3 of the days from the previous year, and 1/6 of the days from the first year.

The IRS also has rules regarding what constitutes a day. For example, commuting to work from a neighboring country (e.g., Mexico and Canada) does not count as a day. Also, exempt from this test are certain foreign government-related individuals, teachers, students, and professional athletes temporarily in the United States.

Do I Meet the Substantial Presence Test?

It is important to consult the laws of the country for which the test will be performed. If wanting to find out about meeting the U.S.’s substantial presence test, you must consider the number of days present within the last three years.

First, you must have been physically present in the United States for 31 days of the current year. If so, count the full number of days present for the current year. Then, multiply the number of days present in year 1 by 1/6 and the days in year 2 by 1/3. Sum the totals. If the result is 183 or more, you are a resident. Lastly, if none of the IRS qualifying exceptions apply, you are a resident.

What Is the American Opportunity Tax Credit (AOTC)?

The American Opportunity Tax Credit (AOTC) is a tax credit for qualified education expenses associated with the first four years of a student’s postsecondary education. The maximum annual credit is $2,500 per eligible student. The student, someone claiming the student as a dependent, or a spouse making postsecondary education payments can claim the AOTC on their tax return.

Understanding the American Opportunity Tax Credit (AOTC)

With the AOTC, a household with a qualifying student can receive a maximum $2,500 tax credit per year for the first four years of higher education. Parents claiming a dependent child who is a full-time student ages 19 to 24 can claim an additional $500 Child Tax Credit.

The AOTC helps with educational costs such as tuition and other expenses related to a student’s coursework. Eligible students (or their parents) can claim 100% of the first $2,000 spent on school expenses and 25% of the next $2,000. This comes out to a maximum credit of $2,500: (100% × $2,000) + (25% × $2,000).

In general, tax credits are refundable, nonrefundable, or partially refundable. Up to $1,000 (40%) of the AOTC is refundable, making it a partially refundable tax credit. So, if the credit brings your tax liability to $0, you can receive 40% of your eligible credit (up to $1,000) as a refund.

AOTC Eligibility Requirements

Like other tax credits, you must meet specific eligibility requirements to claim the AOTC.

Who Can Claim the AOTC?

To claim the AOTC on your tax return, you must meet all three of these requirements:

• You pay qualified education expenses for higher education.
• You pay the education expenses for an eligible student.
• The eligible student is either you, your spouse, or a dependent whom you claim on your tax return.

Additionally, you must receive Internal Revenue Service (IRS) Form 1098-T to claim the credit. Here’s an example of a completed form:

Source: Internal Revenue Service

Which Students Qualify for the AOTC?

A student is eligible for the AOTC only if they meet certain requirements. Specifically, the student must:

• Be taking courses toward a degree or some other recognized education qualification
• Be enrolled at least part time for at least one academic period beginning in the tax year
• Not have finished the first four years of higher education at the beginning of the tax year
• Not have claimed the AOTC (or the former Hope credit) for more than four tax years
• Not have a felony drug conviction at the end of the tax year

Which Expenses Qualify for the AOTC?

For the purposes of the AOTC, qualified education expenses include tuition and some related costs required for attending an eligible educational institution. An eligible educational institution is any accredited public, nonprofit, or private college, university, vocational school, or other postsecondary educational institution. Related expenses include:

• Student activity fees paid to the school as a condition of enrollment or attendance
• Books, supplies, and equipment needed for classes, whether or not you buy them from the school

You can pay for qualified education expenses with student loans. However, you can’t claim the credit if you paid for expenses with scholarships, grants, employer-provided assistance, or funds from a 529 savings plan.

What Are the Income Limits for the AOTC?

To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 if married filing jointly). The credit begins to phase out above these limits and disappears entirely if your MAGI is above $90,000 ($180,000 for married filing jointly).