The penalty tax for uninsured Americans, also known as a “shared responsibility payment,” is very much avoidable. There are 20+ exemptions which will give you a free pass around the legislation and most uninsured Americans will qualify for one or more of them.
The Affordable Care Act penalty tax for 2014 is $95 per adult or $47.50 per child up to $285(max) per family or 1 percent of household income(whichever is greater). In 2015 that will increase to $325 per adult or $162.50 per child up to $975(max) per family or 2 percent of income(whichever is greater) and in 2016 expect the penalties to swell to $695 per adult or $347.50 per child up to $2,085(max) per family or 2.5 percent of household income(whichever is greater).
You can estimate what you may be penalized for the 3 year span before any exemptions by using the Tax Policy Center’s Affordable Care Act penalty calculator.
The Congressional Budget Office estimates(pdf file) roughly 4 million uninsured people will pay penalties but another 26 million won’t. The list of waivers consists of 20+ possible reasons for exemption. Eight groups exempt from the penalty tax listed on the Tax Policy Center website are as follows:
1. Individuals with income below the income tax filing threshold
2. Individuals for whom the cost of getting health insurance (net of ACA subsidies) would exceed 8% of household income.
3. Individuals in states that did not accept the ACA’s Medicaid expansion who would have qualified for Medicaid under the expansion. If you live in a state that did not expand Medicaid, you qualify for this hardship exemption(you must apply for Medicaid in your state and be denied. Your “denial of eligibility” letter is the documentation you must send with your hardship exemption application. See list of ‘hardship exemptions below)
4. Members of Indian tribes
5. Members of certain religious faiths. The Social Security Administration administers the process for recognizing these sects according to the criteria in the law.
6. Members of a health care sharing ministry
7. Individuals not legally in the U.S. (undocumented aliens)
8. Incarcerated individuals
For further information, see pages 53651-53655 and 53659 of “Shared Responsibility Payment for Not Maintaining Minimum Essential Coverage” at http://www.gpo.gov/fdsys/pkg/FR-2013-08-30/pdf/2013-21157.pdf
Many more Americans will qualify for an “Obamacare Hardship Exemption.” The following table contains those 14 specific exemptions:
ObamaCare Hardship Categories and Documentation
You may qualify for a hardship exemption if you experienced one of the following:
|Hardship number||Category||Submit this documentation with your application|
|1.||You were homeless.||None|
|2.||You were evicted in the past 6 months or were facing eviction or foreclosure.||Copy of eviction or foreclosure notice|
|3.||You received a shut-off notice from a utility company.||Copy of shut-off notice from a utility company|
|4.||You recently experienced domestic violence.||None|
|5.||You recently experienced the death of a close family member.||Copy of death certificate, copy of death notice from newspaper, or copy of other official notice of death|
|6.||You experienced a fire, flood, or other natural human-caused disaster that caused substantial damage to your property.||Copy of police or fire report, insurance claim, or other document from government agency, private entity, or news source documenting event|
|7.||You filed for bankruptcy in the last 6 months||Copy of bankruptcy filing|
|8.||You had medical expenses you couldn’t pay in the last 24 months.||Copies of medical bills|
|9.||You experienced unexpected increases in necessary expenses due to caring for an ill, disabled, or aging family member.||Copies of receipts related to care|
|10.||You expect to claim a child as a tax dependent who’s been denied coverage in Medicaid and the Children’s Health Insurance Program (CHIP), and another person is required by court order to give medical support to the child.||Copy of medical support order AND copies of eligibility notices for Medicaid and CHIP showing that the child has been denied coverage|
|11.||As a result of an eligibility appeals decision, you’re eligible either for:1) enrollment in a qualified health plan (QHP) through the Marketplace, 2) lower costs on your monthly premiums, or 3) cost-sharing reductions for a time period when you weren’t enrolled in a QHP through the Marketplace.||Copy of notice of appeals decision|
|12.||You were determined ineligible for Medicaid because your state didn’t expand eligibility for Medicaid under the Affordable Care Act.||Copy of notice of denial of eligibility for Medicaid|
|13.||You received a notice saying that your current health insurance plan is being cancelled, and you consider the other plans available unaffordable.||Copy of notice of cancellation|
|14.||You experienced another hardship in obtaining health insurance.||Please submit documentation if possible|
You can apply for some exemptions by filling out an exemption application. Others you can claim when you fill out your federal income tax form. Some you can apply for either way. If you plan on applying for an exemption don’t wait til tax time to find out. In some cases, you’ll have to fill out a form and provide certain documentation to verify you qualify, resulting in a wait for confirmation and approval before you can claim the exemption and that would most surely delay your federal tax refund unless you take care of it ahead of time.
Fact: You can have a lapse of coverage of up to 3 months per year and not be penalized(short coverage gap extension).
If you don’t have taxable income you don’t have to worry about all this, but it’s possible someone else who’s claiming you as a dependent will have to deal with it. The person filing and claiming you is required to make a payment for every household member they claim as a dependent who isn’t insured throughout the year. This is an especially important factor to keep in mind for one income families where one spouse stays home and is uninsured. The stay-at-home parent won’t have a taxable income to report but they’re still required to keep up coverage or the ‘head of household’ tax filer will be held accountable for the subsequent shared responsibility payment for that dependent under the terms of the Affordable Care Act. In some cases, especially beginning in 2016 – it may be more financially prudent to omit that dependent altogether to avoid the penalty.
Finally, the federal government cannot legally enforce the shared responsibility provision with liens, jail time or any other typical methods of collection. The only way the IRS can collect the fee is to deduct it from a federal income tax refund. W4 forms, in particular the number of dependents on that form, can be easily amended to make sure no federal over-payments are made throughout the year via income withholding.