A Refresher on the ACA’s Tax Penalty on Individuals Without Health Insurance

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01 Aug A Refresher on the ACA’s Tax Penalty on Individuals Without Health Insurance

Now that Affordable Care Act (ACA) repeal and replacement efforts appear to have collapsed, at least for the time being, it is 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, here is 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 are not a U.S. citizen or national
  • They are incarcerated
  • They are a member of a Native American tribe

Calculating the tax

So, how much can the penalty cost? That is a tricky question. If you owe the penalty, the tentative amount equals the greater of the following two prongs:

  1. The applicable percentage of your household income above the applicable federal income tax return filing threshold
  2. The applicable dollar amount times the number of uninsured individuals in your household, limited to 300 percent of the applicable dollar amount.

In terms of the percentage-of-income prong of the penalty, the applicable percentage of income is 2.5 percent 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 is under age 18, the applicable dollar amounts are cut by 50 percent, to $347.50. The maximum penalty under this prong for 2017 is $2,085 (300 percent of $695).

The final penalty amount per person cannot 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 percent 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 is not certain. The IRS has been accepting 2016 tax returns even if a taxpayer has not 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.