Obamacare – The New Tax Penalty

The IRS has plenty of penalties it can impose for late filing, late payment, interest, and much more. Starting on the 2014 tax returns there’s a new penalty the IRS can impose based on the Patient Protection and Affordable Care Act, commonly known as Obamacare.

With a few exceptions, everybody is expected to have minimal qualifying health insurance in place by April 1st 2014. It doesn’t matter how you obtain the insurance; you may already have it through your work, Medicare, or Medicaid. For some people, subsidies are available through their state’s health insurance marketplace (also called the exchange).

If you don’t have health insurance in place, you will have to pay a fee on your Federal income taxes for every month you’re without coverage. For 2014, this fee is $95 per adult (half for a child) up to a maximum of $285 per family, or 1% of your taxable income, whichever is greater. This penalty goes up in subsequent years, being 2% of income or $325 per person in 2015, and 2.5% of income or $695 per person in 2016. After that the amount will continue to be adjusted for inflation.

Of course, you may be exempt from these penalties. For example, you’re allowed a “gap” of up to three months without coverage during the year. Or, perhaps you fall under the hardship conditions of being homeless, evicted, the victim of domestic violence, etc. Or, maybe your religion objects to insurance. This is a complex law, spanning over 1,000 pages, but it will apply to most people. This is where it gets interesting.

When you’re completing your 2014 tax return (in 2015) you’re expected to state whether, or not, you have qualifying health insurance. However, there does not appear to be anything in place that will enable to IRS to check this information. It’s difficult enough for the IRS to confirm all the standard income and expense tax form information, but the IRS does have procedures in place and “red flags” suspicious returns.

Even if everybody is completely honest and states when they do not have insurance and owe the new penalty, the IRS still has the problem of collecting the money. Unlike other debts that we discuss on 20/20 Tax Debt Help, for the Obamacare penalty, the IRS cannot issue any liens or levies. In fact, the only way they can collect the money (if somebody chooses not to pay it) is by subtracting it from any tax refund.

Now, we’re not suggesting for a moment that you should try to not get health insurance or try to avoid paying the penalty. However, it is clear that there are serious issues with Obamacare collection procedures and the burden it will place on an already overtaxed (pun intended) IRS.