The Tax Cuts and Jobs Act (HR 1, “TCJA”), enacted by Congress in December 2017, eliminates the individual health insurance mandate under the Affordable Care Act (popularly called Obamacare). However, this provision doesn't take effect until 2019. Individuals who are not otherwise exempt from the health insurance mandate are required to have health insurance in 2018, which means 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. For more information on the repeal of the individual health mandate and how it affects the Affordable Care Act, see How Does the Tax Cuts and Jobs Act Affect Obamacare?
The amount of the penalty is either a flat dollar amount 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.
The penalty is either a flat amount assessed for each uninsured family member, or a percentage of your family income, whichever is greater. For 2018 the flat amount penalty is $695 per adult and $347.50 per child under 18 (up to a maximum of $2,085 per family). The percentage penalty is 2.5% of household income. However, the percentage penalty may never exceed the national average cost of a bronze-level health plan. For 2017, this was $3,625 for an individual and $16,320 for a family of five or more. The national cost of bronze level plans for 2018 has not been announced, but will likely be much higher than in 2018, resulting in a higher penalty. However, the vast majority of taxpayers pay the flat amount. You need a fairly large income to be subject to the percentage penalty: In 2017, for example, the percentage penalty applied only to uninsured single individuals with incomes of $140,960, and $673,600 for uninsured families.
You can find an online penalty calculator at https://taxpayeradvocate.irs.gov/estimator/isrp/
There are several exemptions from the penalty, the most common of which include the following:
- the most affordable coverage costs more than 8.13% of your household income
- you were uninsured for less than three consecutive months during the year
- you are exempt from filing a tax return because your income is too low
- you are native American or eligible for health services through an Indian health services provider
- your religion objects to the use of insurance
- you’re in prison
- you belong to a health care sharing ministry
- you have been outside the United States for more than one year
- you qualify for a hardship exemption due to homelessness, bankruptcy, eviction, or a similar circumstance.
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.
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 to 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.
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.