Now that Affordable Care Act (ACA) repeal and replacement
efforts appear to have collapsed, at least for the time being, it’s a good time
for a refresher on the tax penalty the ACA imposes on individuals who fail to
have “minimum essential” health insurance coverage for any month of the year.
This requirement is commonly called the “individual mandate.”
Penalty exemptions
Before we review how the penalty is calculated, let’s take a
quick look at exceptions to the penalty. Taxpayers may be exempt if they fit
into one of these categories for 2017:
- Their household income is below the federal income tax
return filing threshold.
- They lack access to affordable minimum essential
coverage.
- They suffered a hardship in obtaining coverage.
- They have only a short-term coverage gap.
- They qualify for an exception on religious grounds or have
coverage through a health care sharing ministry.
- They’re not a U.S. citizen or national.
- They’re incarcerated.
- They’re a member of a Native American tribe.
Calculating the tax
So how much can the penalty cost? That’s a tricky question. If
you owe the penalty, the tentative
amount equals the greater
of the following two prongs:
- The applicable percentage of your household income
above the applicable federal income tax return filing threshold, or
- The applicable dollar amount times the number of
uninsured individuals in your household, limited to 300% of the applicable
dollar amount.
In terms of the percentage-of-income prong of the penalty, the
applicable percentage of income is 2.5% for 2017.
In terms of the dollar-amount prong of the penalty, the applicable
dollar amount for each uninsured household member is $695 for 2017. For a
household member who’s under age 18, the applicable dollar amounts are cut by
50%, to $347.50. The maximum penalty under this prong for 2017 is $2,085 (300%
of $695).
The final
penalty amount per person can’t exceed the national average cost of “bronze
coverage” (the cheapest category of ACA-compliant coverage) for your household.
The important thing to know is that a high-income person or household could owe
more than 300% of the applicable dollar amount but not more than the cost of
bronze coverage.
If you have minimum essential coverage for only part of the
year, the final penalty is calculated on a monthly basis using prorated annual
figures.
Also be aware that the extent to which the penalty will continue
to be enforced isn’t certain. The IRS has been accepting 2016 tax returns even
if a taxpayer hasn’t completed the line indicating health coverage status. That
said, the ACA is still the law, so compliance is highly recommended. For more
information about this and other ACA-imposed taxes, contact us.
