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Will you owe a penalty under Obamacare?

After growing in 2015 and 2016, the penalty is unchanged for 2017

Millions of Americans have enrolled in ACA-compliant health plans over the last three years, and the uninsured rate is at an all-time low, with less than 9 percent of the U.S. population uninsured during the first three-quarters of 2016.

Although the ACA includes provisions to make it easier to get insurance — including Medicaid expansion, premium subsidies, and guaranteed-issue coverage — it also includes an individual mandate that requires Americans to purchase health coverage or face a tax penalty.

There are a variety of reasons that nearly 9 percent of the population remains uninsured. Some are in the Medicaid coverage gap, some are undocumented immigrants, some are impacted by the family glitch (in all of those cases, exemptions from the individual mandate are available).

But some folks simply do not want to purchase coverage, or disagree with the ACA in terms of what they consider “affordable.” If you’re among them, one of your 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.

Trump Administration has NOT changed the ACA penalty

In the early days and weeks after Donald Trump won the presidential election, the expectation was that Republicans in Congress would finally be able to repeal at least some aspects of the ACA; the individual mandate penalty was generally at the top of their list of things to eliminate.

But their efforts came to a standstill — which may or may not be temporary — when Republican leadership pulled the American Health Care Act before it reached a vote on the House floor. The bill would have eliminated the individual mandate penalty retroactive to 2016, but it did not have enough Republican support to pass.

Earlier in 2017, following Trump’s Executive Order directing federal agencies to be as lenient as possible in their enforcement of the ACA, the IRS published a statement indicating that they would continue to accept “silent returns” for 2016 (ie, tax returns with the question about whether or not the filer had health insurance left blank).

This is the same protocol that was followed for 2014 and 2015 returns, but prior to Trump’s Executive Order, the IRS had planned to reject 2016 returns that didn’t answer the question one way or the other. Their change in course was a direct result of the Executive Order, but all it did was maintain the status quo that had existed for the past two years. Nothing else changed, and everything about penalty enforcement is still the same as it was in previous years (the penalty is higher for 2016 than it was in prior years, but enforcement is unchanged).

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.

Obamacare penalty calculator




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* 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 are subject to the penalty

Although there were still 33 million uninsured people in the US in 2014, the IRS reported that just 7.9 million tax filers were subject to the penalty in 2014 (out of more than 138 million returns). According to IRS data, 12 million filers qualified for an exemption (See “You won’t pay a tax if:” at the top right of this page).

The number of filers subject to the ACA’s penalty was lower for 2015 (on returns that were filed in 2016), as overall enrollment in health insurance plans had continued to grow. The IRS reported in January 2017 that 6.5 million 2015 tax returns had included individual shared responsibility payments.

For those who had coverage prior to 2014 and don’t qualify for a premium subsidy on a new plan, you may still be able to keep your existing plan throughout 2017: If you have a grandfathered plan, you can keep it as long as your carrier is still allowing it to renew and remain in force. If you have a grandmothered plan that is allowed to renew again in 2017 (in most states, carriers still have that option), you can keep your existing coverage. In both cases, you’re not subject to the penalty, since grandmothered and grandfathered plans are considered minimum essential coverage, despite not being compliant with the ACA.

You also have the option to purchase any of the individual market major medical plans available on or off-exchange in your area in order to avoid the ACA’s penalty (keep in mind that plans that aren’t considered major medical coverage are not subject to the ACA’s regulations, and do not count as minimum essential coverage, meaning you’ll be subject to the penalty if you rely on something like a short-term plan and are not otherwise exempt from the penalty). Although the premium might be higher than your old, non-ACA-compliant plan, your coverage will likely be more comprehensive thanks to the ACA’s consumer protections and mandated essential health benefits. You can still enrol in a plan for 2017 if you experience a qualifying event (be prepared to provide proof of your qualifying event when you enroll).

People who enroll in coverage through health care sharing ministries are exempt from the ACA’s penalty. The coverage is not as robust or regulated as it would be on an ACA-compliant plan, but sharing ministires have an exemption under the ACA.

And of course, most Americans already get health insurance either from an employer or from the government (Medicaid, Medicare, VA); they don’t need to worry about the penalty because employer-sponsored and government-sponsored health insurance count as minimum essential coverage.

How stiff will your penalty be?

The IRS reported that for tax filers subject to the penalty in 2014, the average penalty amount was around $210. That increased substantially for 2015, when the average penalty was around $470.

Although the average penalties are in the hundreds of dollars, the ACA’s individual mandate penalty is a progressive tax: if a family earning $500,000 decided not to join the rest of us in the insurance pool, they could owe a $12,000 penalty for 2016. But to be clear, the vast majority of very high-income families do have health insurance.

Today, the median net family income in the United States is roughly $52,000 (half of U.S. families earn less; half earn more.) For 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; see details below, under “how the penalty works”). 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 Revenue Procedure 2015-15 that the maximum 2015 penalty was $2,484 for a single individual and $12,420 for a family of five or more (both slightly higher than the maximum penalty amounts for 2014). For 2016, Revenue Procedure 2016-43 increased the maximum penalty to $2,676 for a single individual, and $13,380 for a family of five or more, if they were uninsured in 2016. The penalty caps are readjusted annually to reflect changes in the average cost of a bronze plan.

Revenue Procedure 2016-43, detailing the maximum penalty for 2016, wasn’t published until August 2016. So the maximum penalty for 2017 isn’t likely to be available until at least mis-2017. But it’s worth noting that average premiums climbed significantly (roughly 25 percent) for 2017, so the maximum penalty in 2017 is likely to be quite a bit larger than it was for 2016. But the maximum penalties are unlikely to apply to very many people, since most wealthy households are already insured.

health-reform-penalty

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, and may be impacted by the upper cap on the penalty. For example: for 2016, an individual earning less than $37,000 would pay just $695 (flat-dollar calculation) while an individual earning $200,000 would pay a penalty equal to the national average cost of a bronze plan (in 2015, this was $2,484; it increased to $2,676 for 2016). This is because 2.5% of his income above the tax filing threshold would work out to about $4,750, which is higher than the national average cost of a bronze plan.

1) Flat-dollar amount

In 2014, the flat-dollar penalty was $95 per uncovered adult (it climbed 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 was $285 ($975 in 2015, and $2085 in 2016). Starting in 2017, the flat-rate penalty is subject to annual adjustment for inflation. But for 2017, the IRS has confirmed that there’s no inflation adjustment, so the flat-rate penalty will continue to be $695 per adult, with a maximum of $2,085 per family.

2) Percentage of income

In 2014, the penalty was 1 percent (it rose to 2 percent in 2015, 2.5 percent in 2016 and beyond). The penalty is capped at the average cost of a Bronze plan, which for 2016 was $2,676 for an individual and $13,380 for a family of five; this cap adjusts annually to keep up with the average cost of Bronze plans. 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 use 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 non-taxable Social Security benefits, 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.

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