The 2010 Affordable Health Care Act (ACA) (“Obama Care”) provided that taxpayers who elect not to be covered by health insurance will be subject to a penalty starting in 2014. The penalty will be paid when their federal tax return is filed. There are some exceptions when the penalty will not apply. Taxpayers who purchase coverage through an exchange will receive Form 1095-A reporting the monthly health care premiums paid and any advance premium credit payments.
This article will discuss the penalties, penalty exceptions and tax forms required to report.
In 2014, this will be $95 per adult and $48 for each child under age 18. The maximum amount in 2014 is $2,385 per family. The flat penalty increases to $315 in 2015 and $695 in 2016, plus half those amounts for each child under age 18. The maximum penalty is $975 in 2015 and $2,085 in 2016.
Percentage of income
This amount will be 1% of “household income” in 2015 and increase to 2% in 2015 and 2.5% in 2016. There is a cap on the maximum penalty equal to the average cost for a family of five under a bronze-level ACA approved plan. The top penalty kicks in at a “household income” of $50,000 for a family of five and increases as family size and “household income” gets larger. For 2014 the penalty cap will be will be about $2,800 for a family of five with “household income” of $300,000 and $12,240 for a family with three children and a “household income” of $1.2 million. The Tax Policy Center has posted an ACA penalty calculator on its web site (www taxpolicycenter.org). “Household income” is computed by adding back to AGI any foreign-earned income and tax-exempt municipal bond interest. This amount is then reduced by the filing threshold (personal exemption plus the standard deduction) which is the
amount below which a taxpayer is not required to file a tax return. For 2014, it is $20,300 for married filing joint and surviving spouse, $10,150 for single and married filing separate, and $13,000 for head of household.
Taxpayers exempt from the penalty
(1) Taxpayers covered by medicare.
(2) Members of certain religious groups.
(3) Taxpayers not covered under a health care plan for three months or less.
(4) Members of Indian tribes.
(5) Illegal immigrants.
There are other exemptions that can be found at www. IRS.gov.
Some exemptions can be claimed directly on the tax return while others require a certification number which must be reported on the tax return. This number should be provided by the health insurance company.
If taxpayers fail to pay the penalty, it will be difficult for the IRS to identify them. But, starting in 2016, it will easier because insurers and employers will be required will have to send the IRS a computerized list of participants which the IRS can match against their tax return. Even if the IRS determines that a taxpayer is uninsured and owes a penalty, they may not be able to collect it. The ACA states that the IRS cannot use standard collection methods, such as putting a lien against the taxpayers property. But the IRS can charge interest on the unpaid penalties and reduce any future tax refunds for the unpaid interest.
Author’s note: Some information for this article was obtained from “The Health-Care Penalty” by Laura Saunders reported in The Wall Street Journal September 27, 2014.