Money for nothing—that’s what the IRS has in mind

  • by Jimmy Sexton
  • February 10th, 2016

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The Affordable Care Act (Obamacare as most know it) has been in place for a while now.  In fact, we are currently in our third open enrollment period.  This open enrollment period ended on January 31st for you to be covered by March 1st. If you didn’t get on board and pick up health insurance this year you may be in for a surprise when you file your taxes.

Essentially the individual mandate portion of the law requires that you (and members of your family) either have insurance or pay a penalty.  You probably noticed a question on your 1040 asking if you carried health insurance and if not your refund or amount owed was adjusted accordingly. The penalty is referred to as the “shared responsibility payment” or SRP.

Initially the penalty was fairly low—the first year $95 or 1% of an individual’s modified adjusted gross income (MAGI), whichever was higher.  Last year was a little higher, but many people still perceived the penalties were cheaper than the cost of health coverage.

Well guess what.  This year those of you who haven’t secured some type of health insurance will be unpleasantly surprised.  For 2015 the penalty rose to the greater of $325 or 2% of the MAGI, with a maximum of $975 per family;  for 2016 the penalty will be $695 per adult and $347 per child or 2.5% of the families MAGI.  That is a lot of money to fork over with nothing to show for it!

So what are your considerations? And…Why buy health insurance? Can you get around the penalties?

People who fall into the lower income brackets may qualify for certain government subsidies.  If the income is low enough these people may qualify for zero-cost bronze plan which must cover 60% of the enrollee’s healthcare costs.

The more money you earn, the higher the penalty.  However, your SRP will be capped at the full-year cost of the least-expensive bronze plan within your state.

If your household income is below the minimum threshold to file a return, you will be exempted from paying the SRP.

Certain religious groups, American Indian tribes, and Americans living abroad are also exempted from paying the SRP. You may also be able to claim other situations of economic hardship to avoid the penalty, e.g. bankruptcy or natural disaster.

But what if you just say “I’m not paying it?” The IRS cannot seize your property, garnish your wages, or throw you in jail, but they can withhold the money from your refund and an estimated 80% of Americans look forward to that refund each year. If you aren’t getting a refund, the SRP penalty you owe the IRS will grow over time and may make you the target of an audit.

As much as all of us hate paying for health insurance, the protection it provides when you have an unexpected illness or accident may save you from financial disaster.  And, if you have enough premiums, co-pays, and related medical costs, it can also be a tax deduction—the SRP is not tax deductible.

The decision is yours—write the check to the insurance company or the IRS, but it will most likely be one or the other.

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