As we mentioned in a previous post, one of the biggest impacts on individual taxpayers of the Affordable Care Act (“Obamacare”) is an excise tax known as the “Shared Responsibility Payment.” In short, there will be a penalty for individuals not having qualifying health insurance beginning in tax year 2014.

The 2014 penalty is calculated as the greater of:

  1. $95 per uninsured adult plus $47.50 per uninsured person under age 18, not to exceed $285, or
  2. 1%of the taxpayer’s household income* in excess of the threshold amount of income required for filing a tax return.

*Household income is broadly defined as the modified adjusted gross income for taxpayer plus dependents.

The penalty is applied on a monthly basis, so the penalty for not having coverage during 5 months of the year would be 5/12ths of the annual amounts above.

As an illustration, let’s assume a taxpayer lives with a spouse and three children, their total household income is $60,000, and they did not have insurance coverage for all 12 months of 2014.  The taxpayer’s penalty would be the greater of:

  1. $95 x 2 adults plus $47.50 x 3 children, totaling $332.50; however, this calculation is capped at $285, or
  2. 1% of household income beyond the tax-filing threshold of $20,300, or 1% x ($60,000 – 20,300) , totaling $397

Therefore, given our example taxpayer, the penalty for not having insurance coverage in 2014 would be $397.

The penalty increases substantially in 2015 and again in 2016

The 2015 penalty would be the greater of:

  1. $325 per uninsured adult + $162.50 per uninsured child, capped at $975, or
  2. 2% of taxpayer’s household income in excess of the threshold amount required for filing

The 2016 penalty would be the greater of:

  1. $695 per uninsured adult + $347.50 per uninsured child, capped at $2,085, or
  2. 2.5% of taxpayer’s household income in excess of the threshold amount required for filing

In all years, the penalty is ultimately capped at the price of the “national average bronze-level plan premium” offered on health-care exchanges. IRS Rev Proc 2014-46 sets the 2014 bronze-level plan premium for an individual at $2,448 per year, and $12,240 per year for a family of 5 or more. Thus, the maximum penalty in 2014 for being uninsured the entire year would be $2,448 per person, or $12,240 for families of 5 or more.

There are numerous exemptions to the penalty for taxpayers who don’t have insurance, and we’d be more than happy to discuss tax planning for individual situations.  Also, it is important to recognize that business owners & employers have additional unique considerations relating to the Affordable Care Act, and we welcome the chance to discuss those matters as well. Contact us for a review of your situation today!