The Patient Protection and Affordable Care Act is currently on political life support, and many believe that Washington will eliminate the law known as Obamacare in the near future. One of the most controversial aspects of Obamacare was its imposition of penalties for not having creditable health insurance coverage. The so-called individual mandate essentially required everyone to have insurance, and those who didn't had to include a penalty payment on their tax returns.
Now, we have hard data on how much people paid on the individual mandate. The Internal Revenue Service has collected data on tax returns for 2014, which was the first year that included Obamacare penalties. Only a small fraction of Americans had to pay any penalties, and the average amount was relatively small. Nevertheless, with higher penalties having phased in over the ensuing years, the average American has likely seen increases in amounts paid under the provision in subsequent years.
How Obamacare penalties affected the average American
More than 8 million tax returns included provisions for paying an Obamacare penalty, according to the 2014 IRS data. That represented between 5% and 6% of total returns filed. The total amount of payments made for penalties in 2014 was almost $1.7 billion. When you use more precise numbers and do the math, that comes out to an average of about $210 in penalties per return.
That's roughly in line with what one might expect, given the way that Obamacare penalties were structured that year. In 2014, the flat fee for the penalty was $95 per adult and $47.50 per child, up to a family maximum of $285. However, those with relatively high incomes could end up paying more. An alternative calculation involved taking income above $10,000 for single filers or $20,000 for joint filers and imposing a 1% penalty on top of that. If the 1% calculation resulted in a larger penalty than the per-person amounts listed above, then the higher penalty was what one owed. For instance, if a married couple with two children had income of $60,000 and didn't have creditable coverage, then the penalty would be 1% of the $40,000 above the threshold, or $400. Because that would be higher than the $285 penalty due under the per-person rules, the tax return would have to include the $400 amount.
Though $210 might not seem that that big a burden, keep in mind that 2014 was just the first year of Obamacare penalty provisions.
What happened to Obamacare penalties in 2015 and 2016
Penalty amounts dramatically accelerated in years after 2014. During 2015, the penalty per adult without coverage rose from $95 to $325, and the family maximum similarly jumped from $285 to $975. For purposes of the alternative calculation, taxpayers had to use 2% of their income over the threshold rather than 1%.
In 2016, penalties climbed even higher. Adult penalties of $695 per person led to a family maximum of $2,085, and the income-based calculation used a 2.5% tax rate.
The net impact over that two-year period was to multiply the individual and family penalties sevenfold and to raise the income-based calculation by more than double. It's unclear which penalty provision applies more commonly, but it's possible that an average Obamacare penalty of $210 for 2014 could have risen to nearly $1,500 for the average American by 2016 -- if the same people chose not to get creditable coverage over that span of time.
Will Obamacare penalties go away in 2017?
Based on these numbers, it's easy to understand why some opponents of the program want action quickly to eliminate Obamacare. Otherwise, those who might still be among the 8 million who went without coverage in 2014 could face much larger penalties than they saw in 2014.
The Motley Fool has a disclosure policy.