Since the implementation of the Affordable Care Act (ACA), it is mandatory for everyone to carry an approved health insurance policy. As a matter of fact, those choosing not to carry health insurance at all, or an approved policy, must pay a tax penalty each year they are not covered. There are few exceptions to this rule. These exceptions would require an application to be completed and proof that you fall under the exemption. If you do not fall into one of the few coverage exemptions, be prepared to pay a penalty through your annual taxes.
The Penalty
Most people will have a tax penalty assessed if they do not carry approved health insurance. The good news is that this is a sliding scale, based on your income. Therefore, people who choose not to carry insurance may find the penalty is actually cheaper than the insurance based on their income. However, with government grants, this is rare. Another benefit to the way the penalty is determined relates to the number of months you are uninsured. For instance, you are only penalized for the number of months you or your family member does not maintain approved health insurance. If you have an approved health insurance policy for even one month, then you are discounted a month off the penalty. The general penalty for not maintaining an approved health insurance plan is varied. Typically, it is 2.5% of your household’s income. That equates to the total yearly premium for a Bronze health insurance plan found on the Marketplace. This equates to approximately $695 per person over 18 and $347.50 per child under 18. There is a maximum annual penalty of $2,085. This penalty is only assessed to the person, not insured in the household. Therefore, if one spouse is insured and the other lost a job and coverage at a certain point during the year, the uninsured spouse will receive a penalty for the months he or she was not insured. Under the method of percentage, it is calculated on the part of the income above the yearly tax filing requirements. Therefore, if you make less than the minimum income required to file a tax return, you do not have a penalty assessed to your income under this method.
The Exceptions
Most people will be assessed a penalty for not carrying health insurance. However, there are exceptions, as there are with most government policies. These exemptions range from income-based to life changing exemptions. They are income-based, hardship based, health coverage-related, group membership related, and life events based. The key here is to make sure having health coverage does not put more strain on you than not having it. For instance, if your premium will be more than 8.5% of your income, you may qualify for an exemption. Also, people who make below the income required to file a tax return would also qualify for an exemption. Financial hardships, such as a death of a breadwinner or loss of income, may allow you to qualify for an exemption as well. Sometimes the exemption is related to the state in which you live or your health care circumstances. For instance, if you were uninsured for only two consecutive months or less, you may qualify for an exemption. If your state did not expand Medicaid, you might also qualify for an extension. You may even qualify if you are part of a federally recognized group, such as a ministry, Indian tribe, or religious sect. These groups often offer their own, self-funded types of insurance policies. They may not be policies abiding by the rules of the ACA. However, they may qualify for exemptions from penalties. Finally, some exemptions may relate to those who are incarcerated, out of the US for the year, died through the year, or were born during the year. Each of these exemptions has its own time line and stipulations. However, they may allow you to avoid tax penalties, provided you have the proper paperwork and proof that you qualify. To summarize, most people will pay a penalty on their taxes if they choose to not carry an approved insurance policy. This penalty may be as much as $2,085 or 2.5% of the household income. However, it is important to discuss your situation with your tax professional to determine if you may qualify for an exemption from the penalty. While these exemptions are very particular, you may be surprised to learn you may qualify. You may only have to pay a penalty for one of the people in your household, as opposed to your entire family. Here are the 14 exemptions to the health care tax penalty:
- You were homeless
- You were evicted or were facing eviction or foreclosure in the past six months
- You received a shut-off notice from a utility company
- You are a recent victim of domestic violence
- A close family member recently passed
- Your property was recently damaged by fire, flood, or natural human-caused disaster
- You filed for bankruptcy within the past six months
- You expect to claim a child who has been denied medical coverage through Medicaid and CHIP because another party is required by court order to provide medical coverage for the child
- An eligibility appeals decision determined you are eligible for enrollment in a Qualified Health Plan through the marketplace, lower costs on your monthly premiums, or cost sharing reductions for a specified time period
- Your state did not expand Medicaid eligibility, leaving you ineligible for Medicaid
- Your current plan is being canceled and you cannot afford the other available plans; or
- You experienced another hardship in obtaining health insurance
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