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Understanding the ACA Penalty

Are you one of the millions of people who did not sign up for health insurance or discontinued it after signing up in 2013 or 2014? If so, you may owe a penalty on your taxes this year.

ACAI know people who have been healthy most of their lives and have chosen not to invest in health insurance. Good for them. But, under the Affordable Care Act (ACA, aka Obamacare) everyone in the US must have health insurance – through our employers, our state exchanges or through the federal Healthcare Marketplace. The reason for this is that if everyone is in the insurance pool, then doctors and hospitals can be compensated for caring for otherwise uninsured folks, and it helps to cover costs for the people with pre-existing conditions who weren’t covered before the ACA Act. Steve Vernon of CBS MoneyWatch explains it beautifully here.

Who has to pay a penalty?

Because the ACA law requires all non-exempt US citizens to have health insurance, if you choose NOT to carry health insurance you will pay an annual fee called the individual shared responsibility payment (also known as “the penalty”). You pay that fee when you file your federal tax return, unless you are exempt from coverage.

If you were unemployed or if insurance is unaffordable based on your income (e.g. premiums cost more than 8% of your taxable income), you may qualify for an exemption from the penalty. There are other exemptions as well. Learn more about exemptions and how to claim them here.

How is the penalty calculated?

If you do have to pay the penalty, you should know that it is calculated in two ways: 1) as a percentage of household taxable income or 2) a per person flat rate. You pay whichever is higher.

For tax year 2015, the fee is the higher of

1) 2% of household income (maxed out at the equivalent of the total yearly premium for the national average price of a Bronze plan sold through the federal marketplace), or

2) $325 per adult, and $162.50 per child under 18 (maxed at $975).

Each year the penalty gets bigger. In 2016, that fee jumps to 2.5% of household income or $695 per adult and $347.50 per child up to $2,085 per household for all uncovered persons. That could hurt!

Fortunately, you only pay for people in your household who didn’t have insurance (for 3 or more months this year), and you only pay for the months that you or someone in your household was not covered.

What happens if you don’t pay the penalty?

If you do not pay the fee, the IRS will hold back funds from any future tax refunds you are due. They do not issue liens, levies or criminal penalties for not paying the fee.

The best way to avoid the fee is to have insurance for you and your family members. The Health Insurance Marketplace has been set up to help people find insurance. Many people qualify for subsidies, which reduce their premiums significantly. I found a good plan there for my family, and the Healthcare.gov subsidy reduced our premium by half.

Be sure to talk with your accountant about the ACA fee. She can help you prepare for payments or budget for next year’s penalty, if necessary.

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