Health Care Tax Penalty: Facts to Know

The historic U.S. Supreme Court 5-4 decision to uphold the Affordable Care Act, a health care reform law, occurred in June of 2012. One of the facets of this law is the mandate for all Americans to purchase health insurance or pay a penalty.

So how exactly does this work and how will you be affected, if at all?

Let’s tackle the subject, question by question.

When does the mandate to purchase health insurance or pay a penalty go into affect?
Starting in 2014, every legal resident of the U.S will be required to have health insurance or they will be subject to a tax penalty.

How many people are expected to be affected?
According to the Urban Institute, 26 million Americans (or 8% of the population) will be required to get coverage or pay the penalty. Of that 26 million, 18.7 million people will qualify for subsidies or assistance of some kind to pay for or offset their health care insurance premium costs. That leaves 7.3 million or 2% of the American population, according to the numbers calculated by the Urban Institute, that will have to purchase a plan or pay the penalty. Mainstream media has put the number at 6 million Americans who will be affected by the mandate.

What is the minimum penalty?
Starting in 2014, the minimum penalty will be $95 for an individual. Once it is fully implemented in 2016, the minimum penalty would be $695 for an individual person. The amount could be higher depending on income. Exemptions will be in place for low-income individuals. Starting in 2017, the minimum amount to be assessed will rise each year with inflation.

How is the penalty assessed against a family?
The minimum amount for a family is set at 3 times the per-person fee, no matter how many people are in the household.  Children under 18 years old or younger are assessed at half of the adult fee. For example: a family of 4, where both of the children are under 18, would be liable for a minimum penalty of $2,085 in 2016 (3 x $695).

How are those with higher taxable incomes affected?
Their penalty will be 2.5 percent of the household income that exceeds the low income threshold.  The income threshold in 2011, for a person filing an individual tax return is 9,000 and is $19,500 for a couple filing jointly.

Who collects the penalty?
The Internal Revenue Service (IRS).

What if a person refuses to pay?
As the law is stated, the IRS can sue the person(s) for double the amount of tax penalty that was owed. At this point, the IRS has not defined exactly how they will enforce this. The law does not allow the IRS to criminally prosecute a taxpayer for failure to pay the penalty. Additionally, the IRS is not allowed to file a tax lien or levy against a taxpayer’s property or bank accounts.

The bottom line is that most Americans, approximately 92%, will not be subject to the health care tax penalty. Even then, of the balance of 8 percent of Americans, only one fourth of them will actually be in the position of having to choose to pay a full premium for health care or be subject to paying the health care tax penalty.