What Tax Penalty Will I Pay if I Don't Have Health Insurance?
A key provision of the Affordable Care Act is the Individual Mandate, which requires individuals to have insurance or pay a health insurance tax penalty.
A person will generally not have to pay a tax penalty if he or she has health insurance through their employer, purchases insurance directly from an insurance carrier, enrolls in a student health plan or buys coverage from the Federal or State Health Insurance Marketplace.
This is not the case for individuals with plans that provide limited medical coverage or cover only specific medical conditions, such as cancer insurance.
The no health insurance tax penalty applies to everyone without insurance, including children; however, certain individuals may be exempt from the tax. A list of these exemptions can be found here
In 2014, the penalty is the greater of either $95 for each taxpayer and dependent or 1% of the individual’s applicable household income. In 2015, the no insurance tax penalty jumps to $325 per person or 2% of applicable income. For 2016 and thereafter, the tax penalty is the greater of $695 or 2.5% of income.
The maximum flat dollar tax penalty for a family is three times the individual penalty. In 2014, the maximum is $285. For 2015, it will be $975. Each parent receives the full tax penalty. The penalty for each child under the age of 18 is half this amount.
Consequently, a family of four with two children will receive the maximum penalty. In 2014, the combined penalty for the parents is $190 dollars ( $95 + $95), while for the children, it is $95 ($47.50 + $47.50).
A family of three with one child will have a flat dollar maximum liability of $237.50 in 2014 ($95 + $95 + $47.50). For this family, the maximum flat dollar tax penalty in 2015 will be $812.50.
The actual penalty the individual or family must pay is the greater of the flat dollar amount or a percentage of applicable income.
Applicable income is the portion of a taxpayer’s household income that is above the filing threshold.
Below the filing threshold, an individual or family is not required to file an income tax return. They are also exempt from the no health insurance tax penalty.
The filing threshold for an individual in 2014 is $10,150. This consists of the standard deduction of $6,200 and the personal exemption of $3,950. The filing threshold for a married couple filing jointly is $20,300.
In 2015, the filing threshold for an individual is $10,300. For a married couple, it is $20,600.
As stated above, the tax penalty is the greater of a flat dollar amount or a percentage of a person or family’s applicable income. If an individual’s income for tax purposes (modified adjusted gross income or MAGI) is $35,000, their tax penalty is $248.5 in 2014. In 2015, the penalty jumps to $494.
For a family of four with a household income of $100,000, the percentage penalty for 2014 is $797. The filing threshold for this family is $20,300. As a result, their applicable income is $79,700 ($100,000 - $ 20,300). The percentage penalty is 1% of applicable income or $797 ($79,700 * .01).
Since the percentage of income ($797) is greater than the flat dollar amount ($285) , the health insurance tax penalty this family must pay in 2014 is $797.
Here is the same calculation for 2015.
The penalty is the greater of:
- $975 ($325 per individual):
2 adults: $325 * 2 = $ 650
2 children: $162.5 * 2 = $ 325 ( ½ the adult penalty)
- $1,588 ( $100,000 - $20,600 * .02)
In this case, the health insurance tax penalty the family must pay is $1,588.
There is an individual and family cap on the penalty. The cap equals the amount of the national average premium for a bronze–level health plan offered through the Health Insurance Marketplace. The IRS publishes this number each year.
For 2014, the annual bronze level plan premium is $2,448 per individual up to a maximum of five individuals in a family or $12,240.
The IRS requires employers to notify it if an employee has health insurance. The health insurance carrier must do so if an individual or family has a health insurance policy with them.
If a person purchases insurance through the Federal or State Insurance Marketplace, the Marketplace will report the information. These entities will also send the information they send to the IRS to the taxpayer.
If the taxpayer does not have insurance, they must pay the health insurance tax penalty when they submit their income tax filing.
For 2014, this will be April 2015.
The IRS can reduce any refund on those individual that do not pay the penalty; however, they cannot pursue criminal prosecution, assess a penalty, or file notice of a lien if the amount is not paid.