The Affordable Care Act, which will go into full effect in the New Year will not only change the health-care landscape, but it also promises to complicate tax laws.
As you are likely aware, beginning in 2014, individuals without health insurance for up to three consecutive months will face a penalty on their income tax return.
The monthly amount is equal to 1/12 of the greater of:
1. The “flat dollar amount,” the lesser of:
a. $695 per individual, which is the “applicable dollar amount,” for all individuals where there was a failure to meet coverage requirements but maxing out at $95 for 2014 and $325 for 2015. For anyone not yet age 18, 50% of the normal amount or
b. 300% of the “applicable dollar amount” for the calendar year; or
2. An amount equal to the following percentage of the excess of household income over the amount of gross income triggering the requirement to file a return under IRC code section 6012(a)(1): 1% in 2014, 2% in 2015; and 2.5% after 2015.
I think there are plenty of American taxpayers not to mention tax professionals, whose heads are spinning at the language, definitions and complications of deciphering the formulas. And obviously more than one formula must be used. In fact, the calculations have to be run three times. Using the term “greater than” and “less than” indicates a comparison and therefore requires the use of more than one formula to determine the correct answer.
Let’s use an example to help you determine what your penalty amount might be if you refuse to buy health insurance during 2014:
A family of six that consists of mom, dad and four kids under the age of 18 with an income that exceeds the ‘filing threshold amount’ by $30,000 could be on the hook for a couple hundred dollars. Using the “flat dollar amount” the result of using the formula in No. 1, the penalty would be calculated at $285, which is the lesser of the two formulas to determine the penalty:
- $380 – 2 adults x $95 plus 4 kids x $47.50.
- $285 - ($95 x 300%) or
If all we had to deal with were this formula then the penalty amount inflicted on this family would be $285 since that’s the lesser of the two calculations.
But we aren’t done. That’s not necessarily the penalty amount that this family will be required to pay. They must compare this result to the result using the formula in #No. 2 above and between the two formulas the higher figure will be charged:
$300 (1.0% x $30,000 excess household income)
Now we have our answer: $300 - the greater of the two remaining results.
That might not sound terribly expensive. It’s cheaper than purchasing health insurance for a family of six, no doubt. However, the variables in the formula increase as the years go on. By 2016, the $95 per person figure will be replaced with $695, and 1% variable in the formula under No. 2 will be replaced with 2.5%. Let’s see what this family will pay in 2016:
- A. $2,780 (2 adults x $695 plus 4 kids x 347.50)
B. $2,085 (300% x 695) or,
2. $750 (2.5% x $30,000 excess household income)
The family will pay $2,085 in penalties for failing to provide health insurance.
As you know, health insurance is not cheap. I feel for families on a shoestring budget that will be severely penalized and it wouldn’t be surprising if we see an increase in the tax gap due to collection problems associated with levying these penalties.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.