Starting with the 2015 tax season (for 2014 returns), tax returns began including information about health insurance. For most insured Americans, reporting coverage to the IRS is a very simple process, and involves checking a box stating that they had coverage during the year. This applies to everyone who has Medicaid, Medicare, employer-sponsored health insurance, or individual market coverage (including on and off-exchange coverage, along with grandmothered and grandfathered plans).
But what if you didn’t have health insurance? There’s a tax penalty for not having coverage, but people without coverage are actually more likely to qualify for an exemption from the penalty than to be subject to the penalty. In January 2016, the IRS reported that 7.9 million tax filers were subject to the penalty based on being uninsured in 2014, while 12.4 million tax filers claimed an exemption from the penalty.
How do I get an penalty exemption?
You’re granted some exemptions by the IRS when you file your taxes; some exemptions come from the exchange; some can be obtained either way.
If you request – and are granted – an exemption from the exchange, the exchange will send you an exemption certificate number (ECN), which you’ll use to complete Part 1 of Form 8965 when you file your taxes.
If possible, request an exemption from the exchange well in advance of filing your taxes, so that you’ll have the ECN by the time you file (or, if the exemption is denied, you’ll know before filing your taxes). But if you haven’t received your ECN by the time you file your tax return, you can write “pending” on form 8965 in column C where the ECN would go.
If you’re requesting an exemption directly from the IRS, you’ll simply complete form 8965 (part 2 or 3) and file it along with your tax return.
Exemptions you get from the exchange
- Religious exemption
- Hardship exemption
- Your policy was canceled because it didn’t meet the ACA’s requirements, and you consider an ACA-compliant plan to be too expensive. This exemption is valid through October 2016.
- You’re a volunteer with AmeriCorps, VISTA, or the National Civilian Community Corps, with a short-term plan through the volunteer organization. (Short-term coverage is not considered minimum essential coverage and would normally result in a penalty.) Volunteers in these programs also qualify for special enrollment periods to obtain Obamacare-compliant coverage at the start or end of their service.
Exemptions you get from the IRS when you file taxes
- You had one short gap in coverage, not more than two months long. (For 2014 only, the gap could be four months if you enrolled in a plan – including CHIP – by the end of open enrollment and had coverage effective May 1; for all years after 2014, a coverage gap of three months or longer makes you subject to the penalty if you’re not otherwise exempt. The exemption for a gap in coverage only applies to the first gap in coverage you experience during the year; if you’re uninsured for a month in April and another month in September, you’d pay a prorated penalty for the September gap).
- Your income is below the tax filing threshold (you’re automatically exempt from the penalty. But if you’re in a state that has expanded Medicaid, you’re probably eligible for free coverage).
- You lived entirely or mostly (at least 330 days of the year) outside the United States, or you’re not legally present in the U.S.
- Coverage is unaffordable for your household because of the family glitch.
Exemptions granted by the exchange or the IRS
- The lowest-cost plan would have been more than 8.13 percent of your household income in 2016 (this is increasing to 8.16 percent in 2017). You can get this exemption from the exchange based on your projected income for the year, or from the IRS when you file your taxes, based on your actual income.
- You would have been eligible for Medicaid (because your household income is under 138 percent of poverty level), but were deemed ineligible solely because your state did not expand Medicaid.
- You were enrolled in a health care sharing ministry, described in 5000A(d)(2)(B).
- You’re an American Indian or Alaska Native. (Additional beneficial provisions in the ACA apply though, and will likely be more helpful than the penalty exemption.)
- You were incarcerated.