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. Similarly, the IRS reported in January 2017 that for the 2015 tax year, 6.5 million tax filers were subject to the penalty, while 12.7 million filers claimed an exemption (the total uninsured rate dropped from 2014 to 2015, so the total number of tax filers who had no insurance in 2015 was lower).
The penalty will eventually be repealed, under the Tax Cuts and Jobs Act that was enacted in December 2017. But the legislation doesn’t repeal the individual mandate penalty until 2019. For 2018 and all prior years, the individual mandate penalty remains in effect. People who are uninsured in 2018 will still face a penalty when they file their taxes in early 2019, unless they’re eligible for an exemption.
How do I get a 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. Here’s a summary from the IRS.
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
- Coverage is considered unaffordable based on your projected income for the coming year (the exemption based on your actual income at the end of the year can be claimed instead on your tax return). For 2018, coverage is considered unaffordable if your premiums (after any available subsidies are applied) for the lowest-cost bronze plan in the exchange would be more than 8.05 percent of your household income (note that HHS has proposed a change to allow this exemption to be based on the cost of the lowest-cost metal-level plan in the exchange, to account for areas where no bronze plans are available; the IRS has implemented a similar change — detailed below — for people who seek the affordability exemption on their tax returns).
- 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’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).
- The lowest-cost metal-level plan would cost more than 8.05 percent of your household income in 2018. This is based on your actual income, not your projected income; if you’re looking for an exemption based on your projected income, you have to get it in advance, from the exchange. To claim the exemption from the IRS, it will be based on the actual income that you report on your tax return after the year is over. In prior years, they used the cost of the lowest-cost bronze plan to make the eligibility determination for an affordability exemption, but the IRS changed this in 2017, and are using the cost of the lowest-cost metal-level plan, as some areas of the country don’t have bronze plans available in the exchange.
- 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’re a resident of a state that did not expand Medicaid (note that a similar exemption is available from the exchange, if you apply for Medicaid and are found ineligible due to the lack of Medicaid expansion in your state).
- 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 8.16 percent of your household income in 2017, or more than 8.05 percent of your household income in 2018. As noted above, 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 but your state has refused to expand Medicaid (as noted above, you’ll get the exemption from the IRS based on your residence, or from the exchange based on your unsuccessful application for 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.