How Much is the Obamacare Individual Penalty in 2016?

Part of the health insurance mandate is a penalty for noncompliance that the IRS collects.

If you're not exempt from the Obamacare health insurance mandate, you must obtain at least minimal coverage for yourself and your dependents to avoid a tax penalty (officially called a "shared responsibility payment"). This is the only punishment for those who don't comply with the mandate. There are no criminal or other penalties for noncompliance.

The amount of the penalty is either a flat dollar amount (which increases each year) or a percentage of your household income above the annual income tax-filing threshold. You must calculate the penalty using both methods and then you pay whichever amount is greater. The amount is pro-rated based on the number of months during the year that you're uninsured. You will not be subject to the penalty if you're uninsured for less than three months in a given year. If you have coverage for only one day of a calendar month, it counts as coverage for that month. So if you're uninsured for two months in a row and obtain coverage on the last day of the third consecutive month, you will not owe a penalty.

For 2016, the penalty is $695 per adult and $347.50 per child under 18 (up to a maximum of $2,085 per family), or 2.5% of household income, whichever is greater. In other words, the $695 amount is a floor for individuals, not a ceiling.  You must make a payment for each household member who you claim as a dependent. The penalty amount will be indexed for inflation each year starting in 2017. For prior years, the penalties are:

  • 2015: $325 per adult and $162.50 per child (up to $975 for a family), or 2% of household income above the tax return filing threshold, whichever is greater
  • 2014: $95 per adult and $47.50 per child (up to $285 for a family), or 1% of household income above the tax return filing threshold, whichever is greater.  

In all cases, the penalty may never exceed the cost of a “bronze-level” health plan available on your state health insurance exchange. This insures that no one will pay a penalty that is more than the cost of basic coverage in their state.

There are limited exemptions available, the most common of which include the following:

  • for people whose income is below the annual income tax filing threshold
  • where health insurance costs would equal 8% or more of a person’s income, and
  • for anyone who applied to Medicaid and got rejected in a state that rejected Medicaid expansion.

The IRS enforces the penalty. The amount is assessed as a federal tax liability that you're supposed to pay when you file your tax return. The IRS has limited legal powers to collect the penalty. It can’t file a lien on your property or levy against your assets to collect the penalty, nor may it charge interest on any amount you owe. There are also no criminal sanctions available.

The only way the IRS may collect the penalty is by withholding it from your tax refund (if you are eligible for one). Thus, in theory, all you need do is make sure you’re not entitled to a tax refund and you’ll never have to pay the penalty. In other words, if you don’t overpay your taxes, the IRS won’t be able to collect the penalty. In practice, this will prove very difficult, if not impossible for most people. For this strategy to succeed, you would have to eliminate all overpayments to the IRS in all future tax years, not just the year you don’t comply with the Obamacare mandate. The IRS can wait for any year you’re entitled to a refund to collect the penalty. Moreover, as the law is written, the IRS can collect the penalty from overpayments you made in past prior years—at least the prior three years, and maybe longer.

The moral: before you decide to violate the Obamacare health insurance mandate consider that you’ll be liable for a penalty and, sooner or later, the IRS will collect it. You’ll probably be better off just getting health insurance.

 

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