As it stands now, unless someone is exempt from the Shared Responsibility Penalty, people who don’t have health insurance that provides minimum essential benefits will be subject to a penalty for each month that the person and his/her shared responsibility family lacks coverage. A shared responsibility family includes the person and his/her dependents. The shared responsibility family does not include a spouse, however, for people who file joint tax returns, each spouse is personally responsible for his and her spouse’s penalty.
The monthly penalty amount is equal to one-twelfth of the GREATER of:
- A Flat Dollar Amount or
- An Excess Income Amount that is based on a percentage of income
However, the total penalty will not exceed the monthly premium cost of a qualified bronze plan.
Flat Dollar Amount
The flat dollar amount is the LESSER of:
- The sum of the applicable dollar amounts for all individuals included in the taxpayer’s shared responsibility family, or
- 300% of the applicable dollar amount for the calendar year
For individuals age 18 and over, the applicable dollar amounts are:
- $95 for 2014
- $325 for 2015 and
- $695 for 2016
After 2016, these amounts will be adjusted for inflation.
The applicable dollar amounts for individuals under age 18 on the first day of a month is half of the above amounts (i.e., $47.50 for 2014, $162.50 for 2015, and $347.50 for 2016). For example, if a child reaches age 18 on June 15, the penalty for the child will be $23.76 for January through June 2014 ($47.50 divided by 12 times 6 months) plus $47.52 for July through December 2014 ($95 divided by 12 times 6 months) for a total penalty of $71.28.
The 300% limit from above applies to the applicable dollar amount for individuals age 18 and over.
Excess Income Amount
The media is reporting on the flat dollar amount penalty; however, the penalty for 2014 and later may be higher than the flat dollar amount because the penalty is based on the larger of the flat dollar amount or a percentage of excess income.
The excess earned income amount is the excess of the taxpayer’s household income (which includes the income of certain dependents) for the tax year over a threshold gross income amount multiplied by the income percentage. The threshold gross income amount is the amount of income required for an individual to file an income tax return for a particular year (this amount is basically the sum of the standard deduction plus personal exemptions).
The income percentage is:
- 1% for 2013 and 2014
- 2% for 2015
- 2.5% for 2016 and later
Example: Ozzie and Harriet have a 19 year old daughter whom they claim as a dependent. None of them have health insurance. Ozzie and Harriet have $65,000 in gross income and their daughter has $8,000 in gross income. They are not exempt from the shared responsibility penalty. Their penalty is calculated as follows:
Step One: Calculate Flat Dollar Penalty
Since all individuals in the shared responsibility family are age 18 and over, the applicable dollar amount for 2014 is $95. The $95 penalty is multiplied by the 3 individuals in the shared responsibility family to arrive at a flat dollar penalty of $285.
The flat dollar penalty is limited to 300% of the applicable dollar amount. If Ozzie and Harriet had a second child, their flat dollar penalty would not be increased since the $285 penalty is already at the 300% maximum (i.e., $95 * 300% = $285).
Step Two: Calculate Penalty Based on Excess Household Income
The household income for the family is equal to Ozzie and Harriet’s income plus the income of their dependent. Their household income is therefore $73,000. The threshold gross income amount for 2014 is $19,500 so their excess household income is $53,500 ($73,000 less threshold amount of $19,500). The applicable percentage for 2014 is 1%, so their penalty based on excess income is $535.
Step Three: The penalty is the greater of the two amounts, but limited to the monthly premium of a qualified bronze plan.
Their flat dollar penalty is $285 and the penalty based on excess income is $535. Therefore, Ozzie and Harriet’s penalty is $535.
The penalty will be reported on taxpayer’s personal income tax returns. The IRS will not issue liens or levies to collect the penalty and they will not initiate audits based on nonpayment of the penalties. The IRS’ only recourse for nonpayment of the penalty is to reduce refunds owed to taxpayers.
The Premium Assistance Credit May Help
Ozzie and Harriet may benefit from the Premium Assistance Credit. This credit assists taxpayers who are between 100% and 400% of the poverty line. The premium assistance credit equals the excess of a silver level plan premium over an applicable percentage of the taxpayer’s household income.
Example: Ozzie and Harriet are at roughly 375% of the poverty line, so their applicable percentage is 9.5% of income. If Ozzie and Harriet enroll in a silver level health insurance plan and the annual premium is $9,000, the premium assistance credit would be $2,065 and their out of pocket cost for the health insurance premium would be $6,935 (which is 9.5% of their household income).
The Premium Assistance Credit will be described in more detail in a future blog post.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.