Editor’s note: This post was originally written in 2012, but was updated in November 2014 to reflect the adjustments that have been made since then. Our new ebook, “The insider’s guide to Obamacare open enrollment” (download it for free here) also contains a detailed section all about the shared responsibility penalty and how it will impact uninsured Americans over the next few years.
Millions of Americans have enrolled in ACA-compliant health plans in 2014, and the majority of those who purchased their coverage through the exchange are happy with both the price and the coverage. But clearly, not everyone is happy with the reforms – or the individual mandate that requires Americans to purchase health coverage.
Many folks have given serious consideration to the idea of simply not purchasing coverage. If you’re one of them, one of your first concerns will be whether you’ll be subject to a tax that’s built into the law – and if you are, what penalty you might expect to pay.
Must you pay?
Use our calculator to see if your family may be subject to a penalty for not having health insurance. See exclusions at right.
Why pay a penalty when you might qualify for a subsidy instead?
Try our subsidy calculator here.
* For most people, this will just be adjusted gross income from your tax return. But if you have tax-exempt interest or foreign earned income, you'll need to add those amount to your AGI from your 1040 and put the total amount into the penalty calculator. Make sure to include income from any dependents who are required to file a tax return.
If, for whatever reason, you decide not to purchase coverage, you can use the calculator on this page to determine the size of the penalty you would pay. (Find out how the formula for our calculator works in the box at the bottom of this page.)
But here’s the good news: You may not even need to worry about a tax penalty.
A fraction of Americans will
be subject to the penalty
Under the Affordable Care Act, the Urban Institute estimates just 6 percent of the population (roughly 18 million Americans) will even have to consider the question: “Should I purchase health insurance, or pay a tax?” That’s right: a whopping 94 percent of the population will have no reason to worry about paying a penalty. (See “You won’t pay a tax if:” at the top right of this page.)
So … will the remaining 18 million all pay a penalty? Probably not. That’s because roughly 11 million of them are low-income or middle-income Americans who are eligible for a government subsidy to help cover the cost of their premiums for coverage through the state health insurance exchanges. Chances are, most of them will eventually take the government up on its offer to help purchase insurance with a wide range of essential benefits.
That still leaves about 7 million Americans who don’t qualify for a premium subsidy. Because of pre-existing conditions, some of them were unable to obtain health insurance prior to 2014, or could only get high risk pool coverage. But the ACA now allows them access to the full range of plans available in the individual market.
For those who had coverage prior to 2014 and don’t qualify for a premium subsidy on a new plan, there are several options: If you have a grandfathered plan, you can keep it as long as your carrier is still offering it. If you have a grandmothered plan that is allowed to renew again for 2015 (in most states, carriers still have that option), you can keep your existing coverage. If you have a plan that is being cancelled because of the ACA, you have the option to purchase a catastrophic plan and you’re also exempt from the penalty under a hardship exemption that will be valid through October 1, 2016.
And you also have the option to purchase any of the plans available on or off-exchange in your area. Although the premium might be higher than your old plan, your coverage will almost certainly be more comprehensive thanks to the ACA’s consumer protections and mandated essential health benefits.
For all these reasons, the Congressional Budget Office (CBO) estimates that in the end, only about 1.4 percent of the population will actually pay a penalty.
How stiff will your penalty be?
You may be surprised to discover that for median-income families, the penalty that conservatives call a “tax on the middle class” is relatively modest. But it is a progressive tax: if a family earning $500,000 decides it doesn’t want to join the rest of us in the insurance pool, it could owe a $12,000 penalty in 2016.
Today, the median net family income in the United States is roughly $52,000 (half of U.S. families earn less; half earn more.) In 2016, the penalty for a middle-income family of four earning $60,000 would be $2,085 (the flat rate penalty would be used, because it’s larger than the percentage of income penalty). This is far less than the penalty a more affluent family would pay based on a percentage of their income.
The penalty can never exceed the national average cost for a bronze plan though. The IRS announced in July that the maximum 2014 penalty would be $2,448 for a single individual and $12,240 for a family of five or more. The penalty caps will be readjusted annually to reflect changes in the average cost of a bronze plan, but it’s unlikely they will apply to very many people, since most wealthy households are already insured.
How the penalty works
Your tax is the greater of either 1) a flat-dollar amount based on the number of uninsured people in your household; or 2) a percentage of your income (up to the national average cost of a Bronze plan , as determined by the IRS and adjusted annually to reflect changes in premiums).
This means wealthier households will wind up using the second formula. For example: in 2016, an individual earning less than $37,000 would pay just $695 (flat-dollar calculation) while an individual earning $200,000 would pay about $4,750 (2.5% of his income above the tax filing threshold). (Hat tip to the Congressional Research Service.)
1) Flat-dollar amount
In 2014, the flat-dollar penalty is $95 per uncovered adult (rising to $325 in 2015 and $695 in 2016) plus half that amount for each uninsured child under age 18. Your total household penalty is capped at three times the adult rate, no matter how many children you have. In 2014, that’s $285 ($975 in 2015 and $2085 in 2016).
2) Percentage of income
In 2014, the penalty is 1 percent (rising to 2 percent in 2015, 2.5 percent in 2016). The penalty is capped at the average cost of a Bronze plan, which for 2014 is $2,448 for an individual and $12,240 for a family of five; this cap will adjust annually. Wealthy households will be happy to know that they will pay a penalty only on that portion of their adjusted gross income “above and beyond their filing threshold,” explains the Center on Budget Policy and Priorities‘ Judy Solomon.
But if you look at the calculator above, you don’t have to look up your filing threshold. Just enter your adjusted gross income and our calculator will do the rest. For most people, this will simply be adjusted gross income from your tax return. But if you have tax-exempt interest or foreign earned income and housing expenses for Americans living abroad, you’ll need to add those amount to your AGI from your 1040 and put the total amount into the penalty calculator. Be sure to include income from any dependents who are required to file a tax return.