The Obamacare penalty only applies to those who get a tax refund

Owe the IRS money? Good news The Obamacare penalty only applies to those who get a tax refund By Bill Bischoff Starting this year, the Obamacare law imposes a penalty on individuals who fail to have so-called minimum essential health insurance coverage for any month. This coverage requirement is commonly called the individual mandate, and the penalty is the cost for failure to comply. As you will see, however, the penalty lacks teeth, so many folks will probably choose to blow off the individual mandate. In any case, here’s what you need to know about the penalty. Penalty basics You will owe the penalty if you don't have minimum essential coverage for yourself and your dependents. Minimum essential coverage includes certain government sponsored programs (e.g., Medicare, Medicaid, and the Children’s Health Insurance Program), eligible employer-sponsored plans, plans obtained in the individual market, certain grandfathered group plans, and other coverage specified by the Feds. However, if you fit into one of the following categories, you are exempt from the penalty. Your 2014 household income is below the federal income tax return filing threshold (generally $10,150 for singles, $20,300 for married joint-filing couples, and $13,050 for heads of households). Your existing health insurance plan was canceled. You are considered to lack access to affordable minimum essential coverage. For example, coverage under an employer-sponsored plan is considered unaffordable if your required monthly contribution exceeds 8% of household income. You suffered a hardship in obtaining coverage. To qualify for this exception, you should obtain a hardship exception certificate issued by an Insurance Exchange. You have only a short coverage gap. You qualify for an exception on religious grounds. You aren't a U.S. citizen or national or you are in the U.S. illegally. You are incarcerated. You are a member of an Indian tribe. Penalty specifics If you owe the penalty, the tentative amount equals the greater of: (1) the applicable percentage of your household income above the federal income tax return filing threshold or (2) the applicable dollar amount times the number of uninsured individuals in your household, limited to 300% of the applicable dollar amount. The final penalty amount cannot exceed the national average cost of “bronze coverage” (a new term) for your household. In other words, a higher-income household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage. Confusing? You bet. But please hang in there, because things will soon become clearer. Percentage of income prong: The applicable percentage of income is 1% for 2014, 2% for 2015, and 2.5% for 2016 and beyond. Dollar amount prong: The applicable dollar amount for each uninsured household member is $95 for 2104, $325 for 2015, $695 for 2016, and $695 adjusted for inflation for 2017 and beyond. For an under-age-18 household member, the applicable dollar amounts are halved. As stated earlier, this prong of the penalty cannot exceed 300% of the applicable dollar amount (determined without regard to the 50% rule for individuals under age 18) for the year in question. Final penalty amount: As stated earlier, the tentative penalty amount is the greater of the percentage of income prong or the dollar amount prong. But the final penalty is limited to the cost of bronze coverage. If you have minimum essential coverage for only part of the year, your penalty is calculated on a monthly basis using prorated annual figures. Here are some examples As you can see, the penalty rules are pretty complicated. The following examples illustrate how to calculate the penalty in the two simplest situations. Example 1: One-person household with no coverage for entire year Say you are unmarried and live alone. During all of 2014, you have no minimum essential coverage. Your income for the year is $120,000. Your tax return filing threshold for the year is $10,150. Assume the national average premium for bronze coverage for one person is $5,000. In your case, the percentage of income penalty prong is $1,099 [($120,000-$10,150) x 1%]. The dollar amount penalty prong is $95. Your tentative penalty amount is $1,099 (greater of $1,099 or $95). As stated, the annual national average cost of bronze coverage is assumed to be $5,000. Therefore, your final penalty amount for failing to comply with the individual mandate is $1,099 (lesser of $1,099 or $5,000). Note: If your circumstances are the same in 2016, the final penalty amount would be about $2,700. Example 2: Multi-person household with no coverage for entire year Say you are a married joint filer with three under-age-19 kids. During all of 2016, no member of the family has minimum essential coverage. Your household income for the year is $120,000. Your tax return filing threshold for the year is $20,300. Assume the annual national average premium for bronze coverage for a family with two adults and three children is $20,000. In your case, the percentage of income penalty prong is $997 [($120,000-$20,300) x (1%)]. The dollar amount penalty prong is $285, which is the lesser of: (1) [($95 x 2 for the adults) + ($95/2 x 3 for the kids) = $333] or (2) ($95 x 300% = $285). The tentative penalty amount is $997 (greater of $997 or $285). The final penalty amount is $997 (lesser of $997 or the $20,000 cost of bronze coverage). Note: If your circumstances are the same in 2016, the penalty amount would be about $2,400. Dirty little secret: Penalty enforcement is lacking You are supposed to pay any penalty you owe with your Form 1040 for the year—starting with your 2014 return which you will file sometime next year. However, the only enforcement mechanism is that the government can subtract any unpaid penalty from your federal income tax refunds. So if you’re not owed a refund for 2014 or a later year, there will never be any consequences for not paying the penalty. (You aren't subject to criminal prosecution, and the IRS cannot put a lien or levy on your income or assets.) Bottom line: it is hard to understand how the penalty will scare many scofflaws into buying health insurance. Obviously, this is a big flaw in the Obamacare program.