Millions of Americans have enrolled in ACA-compliant health plans over the last three years, 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.
Some folks have given serious consideration to the idea of simply not purchasing coverage. If you’re among 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.
* 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 7.5 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 likely lower for 2015 (on returns that were filed in 2016), as overall enrollment in health insurance plans has continued to grow. As awareness of the ACA’s premium tax credits (subsidies) has increased, more people have opted to take the government up on its offer to help purchase insurance with a wide range of essential benefits.
And even for those who don’t qualify for subsidies, the ACA has expanded access to health insurance, thanks to the guaranteed issue provision for all individual market plans. Because of pre-existing conditions, some people 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, you may still be able to keep your existing coverage for 2017: 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 2017 (in most states, carriers still have that option), you can keep your existing coverage.
But 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 likely be more comprehensive thanks to the ACA’s consumer protections and mandated essential health benefits.
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 and government-sponsored health insurance all 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 $200. But a Kaiser Family Foundation analysis projected that the average penalty assessed in 2016 (for tax filers who were uninsured in 2015) would be nearly five times that much.
And 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, they 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 Revenue Procedure 2015-15 that the maximum 2015 penalty would be $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’re uninsured in 2016. The penalty caps are 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, and may be impacted by the upper cap on the penalty. 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 a penalty equal to the national average cost of a bronze plan (in 2015, this is $2,484, although it will be higher in 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 will be adjusted annually for inflation.
2) Percentage of income
In 2014, the penalty was 1 percent (it rose to 2 percent in 2015, 2.5 percent in 2016). The penalty is capped at the average cost of a Bronze plan, which for 2016 is $2,676 for an individual and $13,380 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 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 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.