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Understanding the health-care coverage penalty

For those who opted out of purchasing health-care coverage mandated by the Affordable Car Act, this is the first year that they will owe a penalty. The massive 2010 health-care changes came with a carrot in the form or tax credits to reduce premiums, but also the stick of a tax penalty for those who did not comply.

For the 2014 tax year, the top penalty under the Individual Shared Responsibility Provision for a family of five could reach $12,240. Penalties will increase even more in 2015 and 2016.

One of the reasons for the penalty is to ensure that young healthy people sign up for insurance, but many in their late 20s or 30s do not qualify for tax credits to offset premium costs. Many young people might prefer to put the amount they would have needed to spend on health-care premiums to paying off student loan debt.

Before opting out it is important to understand the penalty. In 2014, the penalty is either one percent of your household income or $95 per adult and $47.50 for children under 18 in your household, whichever is greater. The flat penalty based on members of a household has a cap of $285 in 2014.

In the next two years, there will be steep increases in the penalty amount. In 2015, for example the flat rate per adult will rise to $395. The household cap increases to $975. The percentage-of-income penalty goes up to 2 percent in 2015 and 2.5 percent in 2016.

Taxpayers who do not have required health coverage will need to pay the penalty in April. However, this year the Internal Revenue Service faces some challenges in identifying those without coverage. This will change as insurers and employers are required to send participant information to the IRS, which the agency can then match against individual returns.

Source: Wall Street Journal, "Penalty for Not Having Health Coverage Can Be Thousands of Dollars," Laura Saunders, Sept. 26, 2014

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