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Friday, July 13, 2012

Health Insurance Penalties Will Be Through Taxes

One of the primary mandates of the Patient Protection Affordable Care Act, a.k.a Obamacare, is that all Americans will be required to purchase health care insurance or pay a penalty. This requirement in itself is understood by most. However, the confusion begins over how the penalty will be enforced.

The amount of the penalties are clearly identified in the Affordable Care Act. They are designed to increase over a three year period from 2014 through 2016. In 2014, the annual penalty will be $95 for each adult and 47.50 for each child, up to a family maximum of $285 or 1 percent of family income, whichever is greater. In 2015, this increases to $325 per adult and $162.50 per child, up to a family maximum of $975 or 2 percent of family income, whichever is greater. The penalty in 2016 will be $695 per adult and $347.50 per child, up to a family maximum of $2,085 or 2.5 percent of family income, whichever is greater.

The purpose of the penalty is not to arbitrarily penalize every American without health insurance. There are both personal and financial exceptions to this rule. The personal exceptions include people without insurance for up to three months because they are in between jobs. Exceptions would also apply to those who have religious objections, people in jail, immigrants and members of Indian tribes. People who are 65 and older who have Medicare would also not be penalized.

Financial exceptions would include anyone whose income is too low to file a federal income tax return. Individuals and families whose earnings are higher could also avoid paying penalties for not buying insurance if their out-of-pocket health insurance costs are more than 8 percent of their income.

Under the Affordable Care Act, states will be required to establish exchanges where individuals and families can buy affordable health insurance. The exchanges will offer subsidies in the form of tax credits on a sliding scale to families with incomes up to four times the Federal Poverty Level. For those with higher incomes, the subsidies would need to be deducted first in order to determine if out-of-pocket health insurance costs exceed 8 percent on income.

The penalties will begin with the 2014 tax year. Insurance companies are required to send proof of insurance to both the IRS and insured people by the end of January, 2015. Those who are not eligible for any exceptions and choose not to buy insurance will have to pay additional taxes. It remains to be seen just how this additional tax owed by those who are penalized will be enforced.

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