Many Americans may not realize the effect that the Affordable Care Act (also known as Obamacare) will have on their 2014 taxes. In some cases, they may be in for a costly surprise when they learn that the penalty for not having essential minimum healthcare coverage is higher than they thought.
Many articles I have seen about the Affordable Care Act point out that the penalty for not having a qualified healthcare plan in 2014 is $95 without clarifying that this is the minimum, not the maximum penalty. In fact, many tax payers will owe more, possibly much more, than this amount, since the actual penalty is $95 or 1% of household income (modified adjusted gross income or MAGI) above the taxpayer’s filing threshold, whichever is greater.
For example, a tax payer under the age of 65 whose filing status is single has a filing threshold of $10,150. As a result, for this taxpayer, the $95 figure only applies if his MAGI is $19,650 or less. As his taxable income rises above this level, so does his penalty. If he has income of $50,000, his Obamacare penalty would be 1% of $39,850 ($50,000 less $10,150) or $399, not $95, which is quite a big difference.
At this point, while there are limited options for taxpayers without insurance to avoid the 2014 Obamacare penalty, there are ways to minimize it, including the following.
Shift Income into 2015
One way to minimize the 2014 penalty is for a taxpayer to shift taxable income out of 2014 and into 2015, for example, by delaying receipt of a year-end bonus. However, this would only be helpful if the taxpayer intends to obtain minimum essential coverage for the 2015 tax year. Otherwise, pushing income into next year could be counterproductive since the penalty will go up substantially in 2015 to 2% of taxable income or $325, whichever is higher.
Get Insurance Now
Another penalty-reducing strategy is to obtain qualified insurance as soon as possible, since the penalty is actually 1/12 the annual penalty for each month that a taxpayer is without insurance. Therefore, if a taxpayer obtains insurance that becomes effective July 1, 2014, his penalty for the year would be cut in half.
Longer term, understanding the actual penalty for not having qualified insurance is important since it could affect the decision whether or not to purchase insurance in a couple of ways.
First, while, for a single taxpayer like the one in the example above with income of $50,000, paying a $399 penalty in 2014 may seem like a bargain compared with the cost of insurance, this calculation could change as the penalties go up in future years.
Second, the taxpayer gets nothing of value from the penalty he pays, whereas if the same money were used to buy insurance, even a high-deductible plan, he would have coverage to help offset healthcare costs, especially in the event of a serious illness or injury.
Please note that the determining whether a taxpayer is likely to owe a penalty payment in 2014 and, if so, how much is more complicated that can be discussed in this brief article. However, much more can be learned about this subject at http://www.irs.gov/uac/Individual-Shared-Responsibility-Provision or by consulting a tax professional.