Monthly Archives: October 2013

How to Calculate the Obamacare Penalty

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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.

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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.

Exemptions from the Penalty for Not Having Health Insurance

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Beginning January 1, 2014 the Affordable Care Act requires individuals to have minimum essential health coverage or face a penalty.  However, there are a number of exemptions that allow certain individuals to avoid the penalty for not having minimum essential health coverage.

These exempt individuals include:

1.        Individuals who are not U.S. citizens or nationals who are nonresident aliens or are present in the U.S. illegally.

2.        Incarcerated individuals, other than those who are incarcerated pending the disposition of charges

3.        Members of Indian tribes

4.        Individuals whose household income is below the threshold for having to file an income tax return

An individual with household income that is less than the income threshold required to file an income tax return is not liable for the penalty.  Household income includes the taxpayer’s income along with his/her spouse’s income PLUS the income of dependents.

5.        Individuals who cannot afford coverage

An individual lacks access to affordable coverage in 2014 if his or her required contribution for minimum essential health insurance coverage for a month exceeds 8% of his or her household income. Again household income includes the individual’s income, his/her spouse’s income, plus any dependents’ income.

6.        Individuals with short coverage gaps

Individuals who do not have minimum essential coverage for a short coverage gap are exempt individuals. A short coverage gap is a continuous period of less than three months. An individual is an exempt individual for a month under the short coverage gap exemption if the last day of the month is part of a short coverage gap (i.e., less than three continuous months)

7.       Hardship Exemption

An applicable individual who is determined by HHS to have suffered a hardship in obtaining coverage under a qualified health plan (QHP) for any day of a month is considered an exempt individual for that month.

Qualifying hardships include:

  • the individual experiences financial or domestic circumstances, including an unexpected natural or human-caused event, such that he or she has a significant, unexpected increase in essential expenses;
  • the expense of purchasing a QHP would cause serious deprivation of food, shelter, clothing, or other necessities; or
  • the individual has experienced other circumstances similar to items a or b that prevent him or her from obtaining coverage under a QHP.

8.        Members of recognized religious sects who have a religious conscience exemption.

To be granted a religious conscience exemption, the individual must be a member of a recognized religious sect on the list maintained by the Social Security Administration (SSA), which includes organizations whose members conscientiously oppose the acceptance of benefits of any private or public insurance that makes payments in the event of death, disability, old age, or retirement or makes payments toward the cost of, or provides services for, medical care (including Medicare or Medicaid).  An individual who is a member of a sect not on the SSA list will be provided information on how the sect can obtain recognition from SSA. However, the individual will not be granted a religious conscience exemption until the state marketplace has information indicating the sect has been recognized by the SSA.

9.        Members of health care sharing ministries

health care sharing ministry (HCSM) is one that meets all of the following requirements:

  • The HCSM is a Section 501(c)(3) organization that is tax-exempt.
  • Members of the organization share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs, and without regard to the state in which a member lives or is employed.
  • Members retain membership even after they develop a medical condition.
  • The HCSM has been in existence (or has a predecessor which has been in existence) at all times since December 31, 1999, and medical expenses of its members have been shared continuously and without interruption since at least December 31, 1999.
  • The HCSM has an annual audit performed by an independent certified public accountant in accordance with generally accepted accounting principles. The audit report must be available to the public by request.

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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.

 

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