Several aspects of the penalty and how it is calculated, however, have been determined via issued regulation. First, it should be pointed out that there is a rather long and growing list of exemptions to the mandate. There are affordability, religious, and hardship exemptions to name just a few. The specific regulations defining these exemptions remain largely untested and murky, at best. For those taxpayers who do not maintain minimum essential coverage and are not covered by a specific exemption, a penalty will be calculated and included as part of their 2014 Form 1040. No taxpayer, however, will be subject to criminal penalty or prosecution for failure of timely payment. “In addition, the IRS cannot file a notice of federal tax lien or levy property to collect an unpaid [ACA] penalty.” It should be pointed out, however, that federal tax liens arise automatically - known as a silent lien - when the IRS assesses a tax. Therefore the ACA only restricts the IRS from filing the tax lien; it doesn’t actually prevent its creation.
The amount of the penalty for any month is equal to the lesser of:
1. the amount of the national average premium for qualified health plans that offer a bronze-level of coverage...or
2. the sum of the monthly penalty amounts for the tax year as defined by ACA, where the monthly penalty amounts are the greater of:
a. an applicable dollar amount per uninsured person...up to a maximum of 300% of the applicable amount, or
b. an applicable percentage of income as defined by the ACA.
As of this writing, the ACA defines the annual penalty from point a above as:
$95 for 2014,
$325 for 2015,
$695 for 2016, and
$695 adjusted for inflation thereafter…
The applicable percentage of income (point b) indexes in the same fashion from 1% in 2014 to 2.5% in 2016.
From this we can draw several conclusion about the penalty. 1) The bronze level costs mentioned in point one will typically exceed the calculated penalty amount in point two. Thus, given the determination between the two is defined as the lesser of, the monthly penalty calculation in point two will usually prevail. Given this assumption, lower income taxpayers will likely fall under the penalty defined in point a - a set dollar amount per person limited to 300% of that dollar amount; while the penalty for relatively higher income taxpayers will simply be a set percentage of their income.
Taxpayers will have to determine if the penalty, however calculated, will exceed their insurance costs. As an example, for 2014 an uninsured individual with no dependants earning $50,000 in Maryland would be subject to a penalty of $399 (1% of income over annual filing threshold ). Base level high deductible coverage for the same type of person currently ranges from $198-439 per month.
This obvious incentive to pay the penalty will diminish slightly over time as the annual penalty and applicable income percentages increase. Also, Congress will be under enormous pressure to eliminate this disparity as revenue falls short of projections due to younger and healthier taxpayers, the very people expected to subsidize the rest of the insurable pool, opt to pay the penalty rather than buy overpriced insurance policies.
It remains to be seen how these issues will be sorted out. Call The Rodeheaver Group at 301-334-3127 to find out how we can help you navigate these and other tax issues.
 “Affordable Care Act Analysis”. Wolters Kluwer publication. Section 205. Individual Insurance Mandate.