What Tax Penalty Will I Pay in 2016 if I Don't Have Health Insurance?
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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, which the IRS calls the Shared Responsibility Payment.
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 Shared Responsibility Payment applies to everyone without insurance, including children; however, certain individuals may be exempt from the tax. You can find a list of these exemptions here
While the calculations that follow are done on an annual basis, the actually penalty only applies for those months you are without health insurance.
The penalty is the greater of a flat dollar payment or a percentage of your household income.
For the 2015 tax year, the flat dollar penalty is $325 for each taxpayer and $162.5 for each child under the age of 18. The percentage of income penalty is 2% of the individual’s applicable household income. In 2016, the Shared Responsibility Payment jumps to $695 per person / $347.5 per child or 2.5% of applicable income.
The maximum flat dollar tax penalty for a family is three times the individual penalty. In 2015, the maximum is $975 ($325 * 3). For 2016, it will be $2,085. Each parent receives the full tax penalty. The penalty for a child under the age of 18 is half this amount; consequently, a family of four with two children will hit the maximum flat dollar penalty, although what they actually pay will depend on the percentage of income calculation.
In 2015, the combined flat dollar penalty for the parents is $650 dollars ($325 + $325), while for the children, it is $325 ($162.50 + $162.50).
A family of three with one child will have a flat dollar maximum liability of $812.50 in 2015 ($325 + $325 + $162.5).
For this family, the maximum flat dollar tax penalty in 2016 will be $1,737.50.
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 Shared Responsibility Payment.
The filing threshold
for an individual under age 65 in 2015 is $10,300. This consists of the standard deduction of $6,300 and the personal exemption of $4,000. The filing threshold
for a married couple under age 65 filing jointly 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 2015 tax penalty on a percentage of income basis is $494 ($35,000 - $10,300 * .02). The flat dollar payment for this person is $325. Since the percentage of income payment ($494) is greater than the flat dollar payment ($325), the individual’s 2015 tax penalty is $494.
For a family of four with a household income of $100,000, their filing threshold
is $20,600. As a result, their applicable income is $79,400 ($100,000 – $ 20,600). The percentage penalty is 2% of applicable income or $1,588 ($79,400 * .02).
Since the percentage of income penalty for this family ($1,588) is greater than the flat dollar payment ($975), the tax penalty this family must pay in 2015 is $1,588 or $132 on a monthly basis.
Here is the same calculation for 2016.
The penalty is the greater of:
- A flat dollar payment of $2,085
- 2 adults: $695 * 2 = $1,390
- 2 children: $347.5 * 2 = $695 ( ½ the adult penalty)
- Total: $2,085 ($1,390 + $695)
- A percentage of applicable income penalty of $1,982.5 ( $100,000 – $20,700 * .025)
In this case, the penalty this family must pay is $2,085 or $173.75 for each month the family is uninsured.
There is an individual and family cap on the penalty. The cap is equal to the amount of the national average premium for a Bronze–level health plan offered through the Health Insurance Marketplace. For the 2015 tax year, the annual Bronze-level plan premium is $2,484 per individual up to a maximum of five individuals in a family or $12,420 ($2,484 * 5).
In the two calculations shown above, neither payment exceeds the cap.
The IRS requires employers to notify it if an employee has health insurance. The health insurance carrier must also 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 2015, this will be April 2016.
The IRS can reduce any refund on those individual that do not pay the penalty. However, they cannot purse criminal prosecution, assess a penalty, or file notice of a lien if the amount is not paid.