How to Determine if You’ll Owe the Obamacare Penalty Tax

Obamacare Penalty TaxThe Affordable Care Act (ACA) was the biggest overhaul in the US healthcare system since the implementation of Medicare in 1965. It is an attempt to expand health care coverage to the entire population, as well as to eliminate traditional barriers, such as pre-existing conditions. These benefits, however, do not come without cost. One of those costs for many without health insurance will be the penalty tax.

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.

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 Year201420152016
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:

  1. You’re uninsured for less than 3 months of the year
  2. Individuals with income below the income tax filing threshold
  3. 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.)
  4. Individuals in states that did not accept the ACA’s Medicaid expansion who would have qualified for Medicaid under the expansion
  5. Members of Indian tribes
  6. Members of certain religious faiths
  7. Members of a health care sharing ministry
  8. Individuals not legally in the U.S. (undocumented aliens)
  9. 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.

Finally, tax preparation software can calculate the penalty. Here is a comparison of TurboTax, H&R Block and TaxACT to determine which is the lowest cost tax software.

Topics: Taxes
Chase Total Checking®

6 Responses to “How to Determine if You’ll Owe the Obamacare Penalty Tax”

  1. How does the Irs know if you had insurance in the previous year? I filed my taxes through turbo tax and the site simply asked “Did you have health insurance all of 2014?” I’ve received no forms from my insurance company like I do W-2s from employers. Couldn’t someone simply put yes and avoid the penalty?

    • Rob Berger

      Ben, according to this article–http://www.rollcall.com/news/irs_enforcement_of_individual_mandate_may_be_light-231023-1.html–the IRS may not know this year. But in the years to come the reporting will become better, presumably as health insurers report to the IRS.

  2. Obamacare is just another tax. The big problem is that they created a big revenue source for healthcare and did not put any cost controls in place. You think healthcare is expensive now, see what it will be in 5 years with no checks on spending.

    • Rob Berger

      Paul, from the IRS website:

      12. Are US citizens living abroad subject to the individual shared responsibility provision?
      Yes. However, U.S. citizens who are not physically present in the United States for at least 330 full days within a 12-month period are treated as having minimum essential coverage for that 12-month period. In addition, U.S. citizens who are bona fide residents of a foreign country (or countries) for an entire taxable year are treated as having minimum essential coverage for that year. In general, these are individuals who qualify for a foreign earned income exclusion under section 911 of the Internal Revenue Code. Individuals may qualify for this rule even if they cannot use the exclusion for all of their foreign earned income because, for example, they are employees of the United States. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for further information on the foreign earned income exclusion. Individuals who qualify for this rule should file Form 8965, Health Coverage Exemptions, with their federal income tax returns.

      U.S. citizens who meet neither the physical presence nor residency requirements will need to maintain minimum essential coverage, qualify for a coverage exemption or make a shared responsibility payment for each month of the year. For this purpose, minimum essential coverage includes a group health plan provided by an overseas employer. One exemption that may be particularly relevant to U.S. citizens living abroad for a small part of a year is the exemption for a short coverage gap. This exemption provides that no shared responsibility payment will be due for a once-per-year gap in coverage that lasts less than three months.

      http://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/Questions-and-Answers-on-the-Individual-Shared-Responsibility-Provision

Leave a Reply