Tax Penalty

What Is the Health Insurance Tax Penalty?

When the Affordable Care Act became law, it brought with it the Individual Mandate that requires U.S. citizens to purchase health insurance.  If they do not qualify for an exemption, and still choose to forgo purchasing health insurance, they will be responsible for paying a tax penalty, also known as the shared responsibility payment.  This penalty, along with any exemptions that you are claiming, will be filed with your taxes each year.

Why Is There a Tax Penalty?

Before the Affordable Care Act, there was a trend for young and healthy people to avoid buying health insurance to save money.  This meant that people who were sick or unhealthy, formed the majority of the risk pool. 

This is part of the reason why premiums were typically high, and without the Individual Mandate requiring U.S. citizens to purchase health insurance, premiums would skyrocket even higher. The Individual Mandate helps level the playing field and lower insurance costs by spreading the risk among healthy and ill alike.

How to Avoid the Tax Penalty

Even though some people don't meet the financial qualifications for Medicaid, they still might not be able to afford the cost of health insurance. There could also be other extenuating circumstances that make it difficult to purchase a health insurance policy. For those who qualify for healthcare exemptions, they will be able to avoid the tax penalty.

Tax Penalty Exemptions

There are several exemptions from the healthcare tax requirement:

  • The cost of the lowest Bronze plan is more than 8.13% of your annual income, making the insurance unaffordable.
  • Your income is below the filing threshold, and you are not required to file a tax return.
  • You received a shut off notice from your utility company. This will exempt you from the penalty for a few months.
  • You live in a state where Medicaid was not expanded, and your income is below 138% of the federal poverty level.

How to Find Out If You Qualify for an Exemption

Your health insurance agent or broker can assist you with determining if you qualify for an exemption from all or portions of the penalty. Some hardship exemptions require that you apply for an exemption certificate from the government, and your agent can help you fill out any necessary paperwork to get the exemption certificate number to file with your tax return.

How Much Does the Tax Penalty Cost?

Beginning in 2017, the tax penalty will be the greater of 2.5% of your modified adjusted income, or the calculated annual flat fee. The percentage rate will not change from year to year, but the flat fee will be adjusted each year to account for inflation.  

Use our free Obamacare Tax Penalty Tool to see how much you can end up paying.

If you are looking to avoid paying any penalty for the year, give one of our experienced agents a call at 858-771-4087, or enter your zip code here!