As part of ThinkAdvisor’s 23 Days of Tax Planning Advice: 2016 series throughout March, in this post we’ll put the individual shared responsibility provision of Obamacare under the microscope. We’ll discuss the rules and penalty for those who fail to maintain qualified health care coverage throughout the year, since employers and employees who don’t comply will need to make payments when filing their federal income tax returns.
There are many rules surrounding this portion of the Affordable Care Act. Starting January 1, 2014, individuals who fail to maintain minimum essential health coverage for the entire year or obtain a qualified exemption are subject to a tax penalty for each month they are without coverage. This tax applies to employers, individuals and even dependent children. Because of its length and complexity, we will not define minimum essential health coverage or list the qualified exemptions. If you would like more details, click here.
As noted in the following table, the penalty is the greater of the percentage amount or the flat dollar amount.
To explain how the penalty is calculated, let’s look at an example of a married couple and their ACA liability. Here are the basic assumptions:
- Calendar Year: 2015
- Married Couple
- Tax Filing Status: Married Filing Jointly
- Age(s): Both are under 65
- Children/Dependents: 3
- MAGI: $125,000
- Health Care Coverage: No coverage entire year
Their 2015 penalty is the greater of:
a) 2.0% of their income that exceeds their filing threshold requirement, or
b) $325 per adult, plus $162.50 per child, up to the family maximum of $975
Here are their numbers:
Under the percentage method, their penalty is $2,088. Using the flat dollar method, it is $975. The greater of the two is under the percentage method.