Tax Tips

Health Insurance Penalties

By Michael Aston, E.A.
Alhambra Tax Center

Before I start talking about health insurance penalties, I would like to inform you the IRS Scammers are (again) in full force.  Taxpayers are receiving telephone calls claiming taxes are owed to the IRS, and they use strong arm tactics about immediate payment.  You can read more about this scam and others at https://www.irs.gov/uac/Tax-Scams-Consumer-Alerts.  Remember the IRS will never call and demand payment.

Last month I covered the Health Insurance 1095’s and what was needed to file.  The most popular question was: “What’s the penalty for not having health insurance”.  Well, for the year 2015 it’s too late. So let’s talk about the year 2016 penalty.

For the tax year 2016, the IRS claims the minimum penalty for Individual Responsibility is 2.5% of income above the filing threshold. Or, a penalty of $695.00 per adult and $347.50 per child; whichever is higher. 

Now…this is where most people are getting confused.

The IRS website implies a family’s maximum penalty will be $2,085.00 (but will change each year).  Does this mean the maximum penalty a family will have to pay is $2,085.00 because of no health insurance?  Well, no. The 2016 maximum penalty a family will have to pay will be based on the national average bronze package sold through the marketplace (the Threshold). And we don’t have those numbers yet.  (Leave it to the IRS to keep us guessing.)

Example 1: One-person household with no coverage for entire year

John’s 2016 income is $100,000 and the single filing threshold is $10,350.  The penalty will be based on the greater of $695 or 2.5% of $100,000 minus $10,350, which is $2241.  Since $2241 is greater than $695 and it is not above the national average for a bronze plan, his penalty will be $2241.

Example 2: Family of five with no coverage for entire year

James and Jane are married filing jointly with three children.  Their 2016 household income is $100,000 and the tax return filing threshold is $20,700.  The penalty will be based on the greater of $2085 (family maximum explained above) or 2.5% of $100,000 minus $20,700, which is $1983.  Since $2085 is greater than $1983 and it is not above the national average for a bronze plan, their penalty will be $2085.

Example 3: One-person household with coverage for eight months

Assume John in the example above had insurance for eight months, his penalty would be $747, $2241 divided by 12, which is $186.75.  Then the $186.75 is multiplied by the 4 months he did not have insurance.

Also, be alert for any new scams involving people calling and asking to pay health insurance penalties.

(There are exemptions that are allowed by the IRS and the Marketplace. You should consult with your tax advisor for eligibility.)