While filing taxes this year you may notice a new question on the form: Did you have health insurance throughout 2014? If yes, check the box. If no, a penalty will be deducted from any refund or added to the amount you owe. With the size of the penalty increasing in 2015, and the February 15 deadline for enrolling in a health insurance plan through government-run exchanges quickly approaching, it may be time to assess your options.
Of course, the matter of health insurance is fraught with assessments of risk. It's hard to part with thousands of dollars knowing that, under the best of circumstances, you'll get nothing in return. If you do get sick or injured, though, you'll collect on that insurance bet and heave a sigh of relief.
What Is Required to Avoid a Penalty?
As long as you have "minimum essential coverage" as defined by the federal government, you're in the clear. The minimum includes coverage through Medicare, Medicaid, veterans' health programs, and employer plans, among others. In fact, you won't be fined even if there's a lapse in coverage lasting less than three months.
There are some exemptions to the mandate. For example, if you belong to a recognized religious sect that objects to insurance coverage; if the cost of insurance is more than 8 percent of your household income; if you are a member of a Native American tribe; and so on. (The full list of allowed exemptions is available at HealthCare.gov.) There are also hardship exemptions that can last for up to a year, depending on the circumstances. Use this free exemption-check tool posted by Turbo Tax to see if you qualify.
A word of caution if you're looking for a free pass. Some exemptions are granted when you fill out your tax return, but others require an application. If you plan to apply for one for the 2014 tax year, do so ASAP. The petitions are reviewed by people, not computers, and the approval process can take weeks. Your tax return must include the unique certificate number assigned when your appeal is approved.
How Large Is the Penalty?
Without an exemption, you must pay the penalty, known as the individual shared responsibility payment in IRS jargon. For the 2014 tax year, this payment is the greater of 1 percent of household income above the tax-filing threshold ($10,150 for a single person, $20,300 for a couple filing jointly) or $95 for each adult and $47.50 for each child under 18. The fee is based on the number of months you go without coverage and is prorated. In 2015, the penalty rises to 2 percent of income or $325 for an adult and $162.50 for a child; it jumps again in 2016 to 2.5 percent of income or $695 for an adult and $347.50 for a child. The per-person penalty is capped at the national average cost of a bronze-level plan (e.g., $2,448 in 2014) and then multiplied by the number of people in the family. The cap is lower for households using the fixed-dollar-amount formula.
The Tax Policy Center has created an Affordable Care Act Tax Penalty Calculator that shows estimated penalty amounts for 2014, 2015, and 2016 based on your income, filing status, family size, and several other factors. For a family of four making $75,000 a year, for example, the penalty jumps to $1,235 this year from $620 in 2014 and to $2,085 in 2016.
Michael Mahoney, senior vice president of consumer marketing at GoHealth.com, told Cheapism that many people don't realize that the fine has increased in 2015. Because the penalty is paid at tax time, "the fear is that people think they'll get a big refund but they'll actually owe the government money." The IRS, however, currently lacks authority to chase after taxpayers who don't qualify for a refund and don't pay the penalty.
Making Insurance Make Sense
The penalty cap helps limit the damage, but it's still a hefty burden for many families. Using 2009 data, researchers found that nearly half of Americans would have a hard time coming up with $2,000 in cash within 30 days. And while the economy has improved significantly since then, median earnings have grown only slowly.
Taxpayers who want to buy a plan to avoid the penalty may be eligible for financial assistance. To qualify for premium assistance, available on all but the catastrophic plans, an applicant must earn less than 400 percent of the federal poverty level. In 2015, that figure amounts to $46,480 for an individual or $95,400 for a family of four. See this chart for a breakdown of eligibility.
How low can premiums go? "I've seen near zero," Mahoney said, "but it really depends on your geographic location and age." The penalty isn't intended to force anyone into buying insurance, he added, but to teach people that they're going to have to pay for something. Given that the penalty increases annually, mandate resisters soon may be paying hundreds or thousands of dollars for nothing.
Weighing the pros and cons of paying for a plan versus paying the penalty can be as complicated as understanding the exemptions and coverage options. For help with the health insurance application process or for answers to questions about coverage, visit the local help section at HealthCare.gov. People earning $53,000 or less, as well as the elderly, disabled, and limited-English speakers, also can turn to The Volunteer Income Tax Assistance program.