What Is The Penalty For Not Having Health Insurance?

If you can afford health insurance but choose not to buy it, you must pay a fee called the individual shared responsibility payment.  You might also see it referred to as the "penalty," "fine," or "individual mandate."

But you may be wondering, "Which costs less, health insurance or the penalty?"

That is a good question since the decision of whether you will purchase health insurance for 2016 needs to be made NOW.   If you want coverage to begin January 1, 2016 your last day to sign up is December 15th.  

Also, many people are under the false impression that the tax penalty is only $95 and that it's cheaper to pay the penalty rather than purchase health insurance.    

So what is the tax penalty for not having insurance in 2016?  Let's find out.

As the table above shows, you will pay…

1. Either a fixed fee OR 
2. a percentage of your income, whichever is greater.

The fixed fee penalty usually hits low income families and ensures everyone pays at least a minimum penalty. 

The percentage of income penalty usually hits middle class or wealthier families and ensures that the penalty isn't so small it's just an inconvenience.

How do I estimate my tax penalty?

The penalties started in 2014 and go up each year.  Using the table above, follow these steps to estimate your penalty:  (You can also use the penalty calculator and miss all the fun!)

1. Calculate the fixed fee penalty
2. Calculate the percentage of income penalty
3. Compare the two results; you owe the larger of the two

There are a few situations that might decrease your family’s penalty.

• Will your family have health insurance for part of the year?
  Only pay the penalty for the months your family is uninsured. For example, if your family was uninsured for seven months of the year, you would only pay seven-twelfths of the yearly health insurance penalty.
• Do you have a large penalty?
  The penalty amount is capped at the national average cost of a bronze-tier health insurance plan for that year. This amount changes every year, so the IRS announces each year's new average figure several months before people start preparing their tax returns. For your 2015 taxes, the amount is $207 per month or $2,484 per year for individuals and $1,035 per month or $12,420 for families.
• Can’t find affordable health insurance?
  If you can't find health insurance that costs you less than 8% of your household income, your family may be exempt from the penalty.

Let's take what we've learned so far and apply it with the following example...

Example

Luke and Krystal have 3 young children.  Nobody in the family has health insurance.  

Step 1: Calculate the fixed fee penalty

They need to calculate the family's minimum penalty for the year 2016.

The table shows the minimum penalty is $695 for each individual in the family. But only the adults owe the full amount. The minimum penalty for each of the kids is half that amount, or $347.50.

$695 (for Luke) + $695 (for Krystal) + $347.50 (for child 1) + $347.50 (for child 2) +$347.50 (for child 3) = $2,432.50 (for the family)

But, a family’s minimum fixed-fee penalty maxes out at three times the individual minimum penalty, or $695x 3 = $2,085. Since the fixed-fee maximum of $2,085 is less than the $2,432.50 we calculated, they’ll use $2,085 for the amount of their minimum family penalty as they move forward with their calculations.

Step 2: Calculate the percentage of income penalty

From the table above, the penalty percentage for 2016 is 2.5% of the income above the filing threshold.

Luke and Krystal estimate their combined household income will be $150,000 in 2016. They file their taxes as a married couple filing jointly, so they’ll use $20,300 as an estimate of their filing threshold, subtracting it from their income before they calculate the percentage.

$150,000 - $20,300 = $129,700

The family’s income - the filing threshold = the portion of their income to be penalized.

$129,700 x 0.025 = $3,242.50

The portion of income to be penalized x the 2.5% penalty (0.025) = their percentage of income penalty.

Step 3:  Compare the two and use the larger

Now that you’ve calculated your family’s minimum penalty and your family’s percentage of income penalty, you need to compare them. Your family’s shared responsibility payment will be based on the larger of those two amounts.

Luke and Krystal's minimum family penalty for 2016 was $2,085 from step 1. Their family’s percentage of income penalty was $3,242.50 from step 2. Since their percentage of income penalty is larger than the minimum penalty, that’s the figure their family penalty will be based on. If their family is uninsured all year, they will owe a shared responsibility payment of $3,242.50 when they file their 2016 income taxes by April 15, 2017.

TIP> Don't forget to check if you can reduce the penalty by one of the items mentioned above.

Do you have a large penalty?

The $3,242.50 they owe is well below the national average cost of a bronze-tier health plan for a family of five, $12,240, so that penalty cap doesn't affect them. 

Will the family have coverage part of the year?

If they are only uninsured part of the year, their penalty will be lower. Let's say Krystal switches jobs in July, and her new employer offers health insurance. If the entire family is covered by health insurance starting in September, then they will only be uninsured for the first 8 months of the year. In this case, they only have to pay the penalty for the portion of the year they are without coverage.

$3,242.50 x 8/12 = $2,161.67

The yearly penalty amount x the part of the year they were uninsured = the final family penalty owed.

In this case, Luke and Krystal will owe a shared responsibility payment of $2,161.67 because their family lacked health insurance coverage for 8 months of 2016. Along with their 2016 income taxes, this penalty tax is due to the IRS by April 15, 2017.

Click the calculator above to estimate penalty

So which costs less, health insurance or the penalty?

Well, unfortunately, like everything in life the answer is not that simple.  You can't know for sure because it's impossible to know what kinds of health care expenses you will incur in the upcoming year. 

Ultimately, the reason for having health insurance isn't so you only have to pay $30 for a doctor's visit.  It's to protect you from financial losses in the event you have serious medical problems.  While you may save a few hundred or few thousand dollars a year by forgoing health insurance and paying the penalty instead, those savings are small in comparison to the losses you'll face if you have to pay $400,000 out of pocket for open heart surgery because you didn't have health insurance.

So get started today and check out the resources below.  Let me know if you have any questions.

Resources

Start a 2016 application now
Get quotes or speak with a licensed agent
Use calculator to estimate tax penalty

If you have questions about your specific situation please visit our website www.kinzeyarndt.com or call 417-882-9000 and schedule an appointment.

Follow me on Twitter, Facebook and LinkedIn for updates