How the Obamacare Penalties Work and How To Avoid Them

Some people may be in for a rude shock when they go to file their income tax return this year: A penalty for not having purchased health insurance!

A look at the health care penalties and the current amnesty policy

The penalties for not having health coverage in 2014 are $95 or 1% of a person’s income, whichever is greater. But by 2016, the penalty rises to $695 per person or 2.5% of income.

For families, the tax will be $285 in 2014. But by 2016, that family penalty will rise to $2,085 or 2.5% of income. You can see the trendline; the penalties are getting more punitive over the years ahead to force those who don’t want insurance to buy it anyway.

The penalty gets collected by the IRS from your tax return. Penalties only apply if you are not covered through work and you do not buy a policy on your own. You’re fine if you have Medicare, Medicaid, or any other government-affiliated health service. And you’re also fine if buying a policy would be too expensive for you; that’s generally defined as having to spend more than 8% of your household income to get coverage.

So that’s the bad news about the penalties. But this good news is that we’re in the midst of an amnesty/safe harbor period where you can buy health insurance as a retroactive purchase. Then you won’t have to pay that penalty. Estimates suggest there are some 4 million people subject to the penalty who are eligible to not have to pay the penalty if they buy insurance now.

I know whenever I talk about the Patient Protection and Affordable Care Act (aka Obamacare), it is a political fault line in the country. Even though I have views that differ from the law of the land, it is my duty and responsibility to explain how it works.

I am not a cheerleader or apologist for the new health care law. My goal is simply to explain how it works and how you as an individual or small business will purchase health insurance. To that end, I will stay out of the political fray and act as a referee—clarifying the rules as they unfold and explaining how they apply to you and your situation.