We usually answer questions about doctors, hospitals and deductibles, but in the age of Healthcare Reform, tax penalties are now a consequence if you don’t follow the law regarding owning a healthcare policy. There is a penalty for each month you and your family are not covered. Here is how it works, according to the Department of Health and Human Services:
The fee for not having health coverage is a result of the “Shared Responsibility Provision” of the ACA, which requires that everyone purchase a medical plan if they are not already covered (by an employer or other program). The fee is calculated one of 2 ways. If you or your dependents don’t have insurance that qualifies as minimum essential coverage you’ll pay either a percentage of your household income or a flat fee — whichever is higher.
The fee in 2016:
If you don’t have coverage in 2016, you’ll pay the higher of these two amounts:
• 2.5% of your yearly household income. (Only the amount of income above the tax filing threshold, about $10,350 for an individual, is used to calculate the penalty.) The maximum penalty is the national average premium for a bronze plan. The IRS is charged with determining this maximum penalty. The IRS has set the maximum penalty for 2016 as $2,085 for a shared responsibility family with five or more members.
• $695 per person for the year ($347.50 per child under 18). The maximum penalty per family using this method is $2,085.
How high can the penalty be? The higher amount of the above two methods of calculation will be what is paid. Your payment amount is capped at the cost of the national average premium for a bronze level health plan available through the Marketplace. For 2016, the annual national average premium for a bronze level health plan available through the Marketplace is $2,676 per year ($223 per month) for an individual and $13,380 per year ($1,115 per month) for a family with five or more members. As you may have guessed, the tax penalty is designed to direct tax payers toward buying at least a bronze level helth plan and, thus, participate in the healthcare insurance system.
The fee in 2017: After year 2016, the flat dollar amounts are based on the 2016 amounts plus an inflation adjustment.
How do you pay the fee?
You’ll pay the fee on the federal income tax return you file for the year you don’t have coverage. Most people will file their 2016 returns in early 2017.
Here are some examples given bu the IRS website updated on November 30, 2016:
Example 1: Single individual with $40,000 income
Jim, an unmarried individual with no dependents, does not have minimum essential coverage for any month during 2016 and does not qualify for an exemption. For 2016, Jim’s household income is $40,000 and his filing threshold is $10,350.
To determine his payment using the income formula, subtract $10,350 (filing threshold) from $40,000 (2016 household income). The result is $29,650. Two and a half percent of $29,650 equals $741.25.
Jim’s flat dollar amount is $695.
Jim’s annual national average premium for bronze level coverage for 2016 is $2,676. Because $741.25 is greater than $695 and is less than $2,676 Jim’s shared responsibility payment for 2016 is $741.25, or $61.77 for each month he does not have coverage (1/12 of $741.25 equals $61.77).
Jim will make his shared responsibility payment for the months he did not have coverage when he files his 2016 income tax return.
Example 2: Married couple with 2 children, $70,000 income
Eduardo and Julia are married and have two children under 18. They do not have minimum essential coverage for any family member for any month during 2016 and no one in the family qualifies for an exemption. For 2016, their household income is $70,000 and their filing threshold is $20,700.
To determine their payment using the income formula, subtract $20,700 (filing threshold) from $70,000 (2016 household income). The result is $49,300. Two and a half percent of $49,300 equals $1,232.50.
Eduardo and Julia’s flat dollar amount is $2,085, or $695 per adult and $347.50 per child. The total of $2,085 is the flat dollar amount in 2016.
The family’s annual national average premium for bronze level coverage for 2016 is $10,704 ($2,676 x 4). Because $2,085 is greater than $1,232.50 and is less than $10,704, Eduardo and Julia’s shared responsibility payment is $2,085 for 2016, or $173.75 per month for each month the family is uninsured (1/12 of $2,085 equals $173.75).
Eduardo and Julia will make their shared responsibility payment for the months they and their children did not have coverage when they file their 2016 income tax return.E
For more details and worksheets, interested readers can talk with their accountant, or check out the irs.gov website
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