The IRS addressed in its Health Care Tax Tip 2014-04 the question of whether a taxpayer owes an “Individual Shared Responsibility Payment” to be paid with the 2014 tax return filed by April 15, 2015.

Do I owe it? And if so, how much do I owe?

The short answer is that for any month in 2014 that a taxpayer or any of a taxpayer’s dependents do not maintain health care coverage and do not qualify for an exemption from having health care coverage, then the taxpayer will owe an “individual shared responsibility payment” with your 2014 tax return filed in 2015.

What is the “less than three-month gap” exemption/exception?

The exception is if a taxpayer went without health care coverage for less than three consecutive months during the year, then the taxpayer may qualify for the short coverage gap exemption and will not have to make a payment for those months. However, if a taxpayer has more than one short coverage gap during a year, the short coverage gap exemption only applies to the first.

So by example, the taxpayer has health care coverage January 1, 2014 until February 28, and May 1 until August 30, and then again from November 15 through December 31, 2014. The first health care coverage gap that falls within the exception is March 1 until April 30 because it is less than three consecutive months. The second gap in coverage is also less than three consecutive months, being September 1 through November 15 – but the exception has already been used for the year so it does not fall within it.

How much does a taxpayer owe?

If a taxpayer (or any dependents) do not maintain health care coverage and do not qualify for an exemption, then the taxpayer must make an individual shared responsibility payment with the 2014 tax return. In general, this health care coverage penalty is either a percentage of the taxpayer’s income or a flat dollar amount, whichever is greater. High income taxpayers will pay a higher penalty. A taxpayer will owe 1/12th of this penalty for each month of the taxpayer or taxpayer’s dependents gap in coverage. The annual payment amount for 2014 is the greater of:

• one percent (1%) of the household income that is above the tax return threshold for the taxpayer’s filing status, such as Married Filing Jointly or single, or
• a family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285.

This individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014. The taxpayer will pay the due amount with the 2014 federal income tax return filed in 2015.

For example, a single adult under age 65 with household income less than $19,650 (but more than $10,150) would pay the $95 flat rate. However, a single adult under age 65 with household income greater than $19,650 would pay an annual payment based on the one percent rate.

Why greater than $19,650? The filing threshold for a single adult in 2014 is 10,150, subtract that from $19,650, leaving a base amount of $9, 500. Multiply 1% to that base amount and the penalty is $95, the same as the flat rate.
So, from the beginning of this year (January 1, 2014) a taxpayer and the family must either have “qualifying” health insurance coverage throughout the year, qualify for an exemption from coverage, or make the above payment when filing the 2014 federal income tax return in 2015.

What qualifies as “qualifying health insurance coverage”?

Qualifying coverage includes coverage provided by an employer, health insurance purchased in the Health Insurance Marketplace, most government-sponsored coverage, and coverage purchased directly from an insurance company. However, qualifying coverage does not include coverage that may provide limited benefits, such as coverage only for vision care or dental care, workers’ compensation, or coverage that only covers a specific disease or condition.

What are the exemptions to obtaining or maintaining required health care coverage?

A taxpayer may be exempt from the requirement to maintain qualified coverage if:

• Have no affordable coverage options because the minimum amount a taxpayer must pay for the annual premiums is more than eight percent (8%) of household income,
• Have a gap in coverage for less than three consecutive months (see above), or
• Qualify for an exemption for one of several other reasons, including having a hardship that prevents the taxpayer from obtaining coverage, or belonging to a group explicitly exempt from the requirement.
• A special hardship exemption applies to taxpayers who purchase their insurance through the Marketplace during the initial enrollment period for 2014 but due to the enrollment process have a coverage gap at the beginning of 2014.

In accordance with Circular 230 Disclosure