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Explaining The Health Care Tax Penalty

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Now that the Supreme Court has upheld the Affordable Care Act (otherwise known as Obamacare) there are many questions about the individual mandate as it relates to new taxes and/or penalties for those who have not purchased health insurance.

It is important to understand that these new taxes (or penalties) will be phased in over the next few years and do not take affect right away.  And with a program that is so politically charged, there could be changes by Congress or the president after the elections in November 2012.

Understanding The Individual Health Care Mandate

The Supreme Court has allowed for significant latitude when it comes to Congress’ ability to tax its citizens.  While Congress cannot force consumers to buy health insurance under the Commerce Clause, it can assess a tax or penalty for those who do not comply.

Beginning in January of 2014, individuals and families must have “essential” health insurance coverage each month or be subjected to a financial penalty.  Those who are below the federal poverty level, can prove hardship conditions or are part of a few other small minorities will be exempted from the new legislation, but not many.

How Much Is The Obamacare Tax Penalty?

Those who choose not to purchase health insurance under the Affordable Care Act will face a financial penalty enforced by the Internal Revenue Service.

The yearly tax penalty for not having essential coverage will be the greater of a flat dollar tax per individual or a percentage of the individual’s income.  In other words, the penalty will vary from household to household.

In 2014, the flat dollar tax amount per individual is $95; in 2015 the amount is $325; and in 2016 the maximum is $695.  For dependents under age 18, the flat dollar amount is half of the individual amounts above.

After 2016, the tax penalty will be indexed to inflation and capped at 300% of the flat dollar amount for families who choose not to purchase health insurance.  Thus, the amount of the penalty will vary for families depending on the number and age of dependents as well as if the maximum cap applies.

  • For example: A family with two adults and one child under age 18 would pay a penalty of $1737.50 in 2016. (1/2 of $695 for the dependent plus $695 x 2 for each adult = $1737.50)
  • A family with two adults and two children over age 18 would cap out and pay $2,085 in yearly penalties in 2016. ($695 x 300% = $2085)

Factoring In Taxable Income To Calculate The Penalty

Here is where it gets a little tricky.  The higher your household income, the higher your penalty for not complying with the health care mandate. This wrinkle begins in 2014 when the majority of the Affordable Care Act will be implemented.

The law states that the percentage of taxable income is the amount in excess of a household’s tax filing threshold phased in at 1% in 2014, 2% in 2015, and 2.5% in 2016.

  • For example: Assuming the tax threshold is $10,000 in 2014 and $50,000 of income for a single filer, the tax penalty would be calculated by subtracting the $10,000 threshold from the $50,000 in taxable income to arrive at $40,000.  That $40,000 would be subject to the 1% penalty rate in 2014 for a total of $400.

An individual with a household income of $50,000 would owe roughly $400 in 2014, which of course is higher than the flat dollar amount of $95 mentioned previously.

Again, the penalty is the greater of the flat dollar amount per individual or a percentage of the individual’s income. In a nutshell, this tax is begin means tested by the ACA.

However, the annual penalty is to be capped based on an amount equal to the national average for premiums of a qualified health plan with a “bronze level” rating by the government and offered through state or federal health insurance exchanges.  As these exchanges have not been setup yet, these numbers are still unknown.

How Will The Health Care Tax Be Implemented?

If an individual or family does not purchase essential health insurance coverage while also not meeting any provisions that allow for an exclusion, then they will be subjected to the tax/penalty.

The fine will be administered federally and reported/calculated on the non-compliant person(s) tax return.  The mandate is to be enforced by the Treasury Department via the Internal Revenue Service.

The fine can be withheld from the offender’s yearly tax rebate if one is due from the Federal government or if none is due, then collected through normal and customary means. In other words, one could expect a letter from the I.R.S in the form of a past-due notice.

It is important to note that at this time the law states that individuals cannot be subjected to criminal penalties, fines, or levies when found to be in non-compliance.

At this point, it is somewhat unclear as to whether late penalties would be implemented for those who do not comply with the mandate or if their maximum penalty would simply carry over to the next year.

Purchasing Health Insurance To Avoid Penalties

While the new health care rules and regulations are yet to be implemented, what is clear is that health care will likely be forever changed by the approval from The Supreme Court of this sweeping legislation.  Most consumers will simply buy health insurance in order to avoid I.R.S. fines/taxes/penalties etc.

Hyers and Associates, Inc. is a full service independent insurance agency and will help you find the coverage you need at the best rates available in your area.  Contact us today for assistance with your health insurance needs.

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Category: Health Care Reform, Health Insurance