Since the law attempts to be revenue neutral, there are provisions in place to offset the higher costs being borne in the healthcare system with new sources of revenue. In other words, new taxes. Some of those taxes will fall on individuals who do not have health insurance coverage at all.
Table of Contents:
What is the ACA Penalty Tax
The tax that is being imposed on those who do not have health insurance coverage is frequently referred to as the ACA penalty tax(some refer to this as the Obamacare Penalty Tax). The first year that it applied was 2014, and the size of the tax will get progressively larger through at least 2016.
Under the law, if you’re uninsured for even part of the year, then 1/12 of the annual penalty will apply to each month that you do not have health insurance. (We’ll discuss the size of the penalty shortly.)
Before you go thinking that the penalty will be assessed for any month in which you do not have coverage, there is a provision that exempts you from having to pay the penalty if you’re uninsured for less than three months out of the year. That will exempt the majority of people who are simply between jobs, and therefore only temporarily without insurance.
The penalty is to be paid through the filing of your annual income tax. However, there are no liens, levies, or criminal penalties for failing to pay the tax. Should you fail to pay the penalty, the IRS will deduct it from any future tax refunds.
How Likely Are You to Be Affected by the Penalty Tax
Because the penalty is new in 2014, projections as to how many people will ultimately have to pay it are no better than wide range estimates. According to the Treasury Department, it is estimated that three to six million people will have to pay the penalty tax.
The breadth of this tax raises the $64,000 question–How much will those subject to the penalty have to pay?
The Penalty for 2014 and 2015
Over the next few years, the Obamacare Penalty Tax looks like this:
- For 2014 – The higher of $95 per person (and $47.50 per child under 18), or 1% of income
- For 2015 – The higher of $325 per person (and $162.50 per child under the age of 18), or 2% of income
- For 2016 – The higher of $695 per person (and presumably $347.50 per child under the age of 18), or 2.5% of income
- After 2016 – The tax will be adjusted for inflation each year.
Calculating the Penalty
Calculating the ACA penalty depends on several factors, including income and family size. The IRS has several predetermined numbers that are also used to compute the penalty, including the average premium for a bronze plan in any given year.
There is an excellent ACA tax penalty calculator that you can use to estimate the impact of the penalty for 2014 and also for subsequent years. How Big is the ACA Tax Penalty–A TPC Calculator is available from the Tax Policy Center, which is a joint project of the Urban Institute and the Brookings Institution.
I went to the tax calculator and entered information for a married couple filing jointly, with two children under 18 and an annual income of $75,000. Here were the results for 2014, 2015 and 2016. As you can see, the penalty rises each year, even though the family’s income doesn’t change.
|Tax penalty: In dollars||$547||$1,088||$2,085|
|Tax penalty: As percentage of AGI||0.7%||1.5%||2.8%|
|Factors determining the penalty :|
|Minimum dollar amount||$285||$975||$2,085|
|Penalty calculated as a percentage of income||$547||$1,088||$1,348|
|Average premium of bronze plan||$9,792||$10,280||$10,796|
Remember that the penalty is the higher of the minimum dollar amount or the percentage of income for each year. In 2014 and 2015, the percentage of income is the higher of the two, and is therefore the required penalty amount. But in 2016 the dollar amount is the higher of the two, and is the final penalty required.
Exceptions to the Penalty
The law provides generous exemptions to the ACA penalty tax, including:
- You’re uninsured for less than 3 months of the year
- Individuals with income below the income tax filing threshold
- Individuals for whom the cost of getting health insurance (net of ACA subsidies) would exceed 8% of household income in 2014 (That percentage would rise in subsequent years if premium growth exceeds Income growth.)
- Individuals in states that did not accept the ACA’s Medicaid expansion who would have qualified for Medicaid under the expansion
- Members of Indian tribes
- Members of certain religious faiths
- Members of a health care sharing ministry
- Individuals not legally in the U.S. (undocumented aliens)
- Incarcerated individuals
Exemption #3 would effectively remove the ACA penalty tax for anyone who does not have approved health insurance by virtue of their inability to afford it. So for example, a family of four earning $50,000 in 2014 would be exempt from the tax because the average annual cost of the policy under a bronze plan would be $9,792, representing nearly 20% of income.
If that’s not enough exemptions for you, there is also an incredibly long list of hardship exemptions. You can check them out on Healthcare.gov’s Hardship exemptions from the fee for not having health coverage page.
You can apply for an exemption by filing IRS Form 8965. The Obamacare penalty tax promises to get even more interesting in a future. And we can probably expect revisions along the way.