Ever since the passage of the Patient Protection and Affordable Care Act, better known as Obamacare, critics have cited the penalties that the law imposes on those who don't have qualifying healthcare coverage. Yet, with those provisions not taking effect until this year, no one has yet seen exactly how Obamacare penalties will work. As the 2014 tax season approaches, though, the IRS has started to provide some guidance on what to expect from the provisions of the Affordable Care Act, and how they'll affect your 2014 taxes.
"Shared responsibility payments" and your tax return
The way the IRS describes it, Obamacare imposes one of three obligations on Americans. As the IRS notes in its discussion on the topic, you and your fellow family members either have to have minimum essential coverage as defined by the PPACA, qualify for an exemption from the responsibility to have minimum essential coverage, or make what the IRS calls a "shared responsibility payment" when you file your 2014 tax return early next year.
If you don't have coverage and don't qualify for an exemption, the amount of your required payment can vary depending on your income. Everyone is subject to a minimum amount of $95 per adult and $47.50 per child, which, for large families, is capped at a total of $285.
But you can end up paying even more in Obamacare penalties if your income is high enough, because the law requires a payment of 1% of whatever income you earn that's above the threshold for having to file a 2014 tax return. For single filers, that amount is $10,150; so, if you make $30,000, your shared responsibility payment will be $198.50. For those with extremely high income levels, the maximum penalty is equal to the annual cost of a bronze-tier healthcare insurance plan available through the federal health insurance marketplace.
Penalties are imposed on a monthly basis. Unless you qualify for an exemption, you'll pay one-twelfth of the annual penalty for each month in which you lacked coverage.
How can you be exempt from Obamacare penalties?
The Affordable Care Act includes a number of provisions that keep you from having to pay Obamacare penalties. The most important is that, if the cost of health insurance would be more than 8% of your household income, you can qualify for an exemption based on a lack of affordable coverage. Because of the subsidies available under the law, lack of affordability isn't as prevalent as it otherwise would be; but in certain situations, it can still apply.
Those who experienced trouble initially signing up for healthcare coverage can also qualify for an exemption to the extent of their delay. Anyone who had a coverage gap of less than three months is exempt from Obamacare penalties, although the exemption only applies to the first such gap in any given year.
Other available exemptions include hardship related to homelessness, foreclosure, unpaid medical bills, and the death of a close family member, among other things. Those who aren't eligible for Medicaid because of their state's decision not to expand Medicaid coverage can also qualify for an exemption.
What your tax return will look like
How you'll claim these exemptions depends on which one applies to your situation. Many exemptions, including the lack of affordable coverage and short coverage gap provisions, are only available when you claim them on your tax return early next year. The federal insurance marketplace can grant exemptions in more limited circumstances.
As far as the mechanics of claiming exemptions and paying penalties are concerned, the IRS doesn't have all the details worked out yet. However, the IRS said earlier this year that it plans to include a line on the 1040 form to indicate whether a tax filer purchased qualifying insurance, and to provide a worksheet to help calculate the appropriate penalty amount.
Enforcement also remains an uncertain aspect of the Obamacare penalty provisions. The law imposes the penalty amount, but it doesn't allow for standard collection procedures like bank-account levies or other measures in order to ensure that the federal government actually receives that amount. Most believe that the IRS won't hesitate to take owed penalty amounts out of tax refunds; but whether it would attempt to take further measures, like garnishing wages or other available alternatives, remains to be seen.
By the time January rolls around, you can expect the IRS to have figured out exactly what the procedure will look like for those who owe Obamacare penalties. Regardless of how the IRS tries to collect those penalty amounts, though, their impact on your 2014 taxes could produce yet another firestorm of controversy about the fairness of the Affordable Care Act.
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