2015 Brings a Big Jump In the Penalty For Not Having Health Insurance
With the coming of the Affordable Care Act, a penalty began to be assessed on any taxpayer that did not have minimum essential health insurance coverage for themselves and the members of their tax family. The amount of that penalty in 2014 was the greater of $95 per adult and $47.50 per child under the age of 18, with the maximum penalty allowable totaling $285 per family, or one percent of household income minus the family’s tax filing threshold amount. The law included an increase to that penalty that would take effect in 2015, and the jump is significant. In 2015 the penalty will be the greater of $325 per adult and $162.50 per child with a maximum penalty allowable totaling $975, or two percent of household income minus the family’s tax filing threshold amount.
Determining household income correctly is essential to figuring out the amount of the penalty owed, and is done by adding up the modified adjusted gross income (MAGI) of every member of the tax family for whom a dependent exemption is being taken and who is required to file taxes. If a dependent child earns $7,000 in babysitting money, that number exceeds their filing threshold so the child would have to file a tax return, but since the parents are claiming the child as a dependent, they would have to include the child’s income within the household figure.
Calculating modified adjusted gross income is simply adjusted gross income combined with non-taxable interest and dividends, nontaxable Social Security benefits and any excluded foreign income added back in. An individual’s tax filing threshold consists of their standard deduction and personal exemptions combined with those of their spouse.
Calculating the penalty owed by a family without insurance is fairly simple. First you calculate the flat penalty, which is $325 per adult and $162.50 per child. The maximum amount is $975, so families with more than two children are not penalized. A family consisting of two parents with one child would have a flat rate penalty of $812.50. That amount would then be compared to the percentage of income amount. A family that earns $65,000 in total would have a tax-filing threshold of $20,600, which is the standard deduction for married filing jointly of $12,600, plus each of the parents’ individual personal exemptions of $4,000. Though the $65,000 household income includes the aforementioned $7,000 in babysitting income earned by the dependent child, the individual personal exemption and standard deduction may not be included in the threshold amount for the penalty calculation. The penalty would be figured as $65,000 minus $20,600 equals $44,400 times two percent, or $888.
Because $888 is the greater number (the flat rate penalty was $812.50), it is the amount that the family would owe in penalties for not having minimum essential health insurance. This calculation would change if the period of having been uninsured is less than the full year, and is determined on a prorated monthly basis which is determined as the penalty amount divided by 12, or in this case, $74 for each month that insurance is not in place.
The calculation of penalties can be very complicated, and it is a good idea to seek professional help. For more information about this subject contact Salt Lake CPA Ken Riter at (801) 613-0900.