The Individual Mandate and Your 2014 Tax Return


Background

Beginning January 1, 2014, all individuals who do not meet certain exemption criteria must have minimum essential health insurance coverage. Nonexempt individuals who do not maintain the required health insurance coverage for themselves and any nonexempt dependents are subject to a shared responsibility penalty for each month that the required insurance is not maintained.  Generally, the individual mandate applies to U.S. citizens and permanent residents. Additionally, foreign nationals residing in the U.S. long enough during a calendar year to qualify as resident aliens for income tax purposes are subject to the mandate

Generally, individuals will obtain the required minimum essential coverage through an eligible employer-sponsored plan or through an individual plan purchased through a state insurance marketplace. Individuals qualifying for Medicare, Medicaid, CHIP, or certain other government sponsored programs are considered to have minimum essential coverage that satisfies the mandate.

A significant factor in determining if an individual (or family) is subject to the individual mandate is the individual’s household income. The IRS and The U.S. Department of Health and Human Services (HHS) have determined that for purposes of the individual mandate, the relevant household income is the income for the year for which the penalty is due (or an exemption from the mandate can be claimed). Of course, this generally means household income cannot be accurately determined for the penalty purposes until the individual files their income tax return.

Any individual whose household income for a tax year is below the gross income amount that requires them to file a federal income tax return is an exempt individual.  For individuals who can be claimed as a dependent on another person’s income tax return (e.g., children), the filing threshold of the person who can properly claim the individual as a dependent is used. Therefore, if an individual (e.g., parent) is exempt, any dependent (e.g., child) who can properly be claimed as a dependent for income tax purposes is also an exempt individual.

Beginning in 2014 all individuals who do not meet certain exemption criteria must have minimum essential health insurance coverage. For every month that the nonexempt individual (or that individual’s nonexempt dependents) does not have minimum essential coverage, a penalty is imposed. For taxpayers who file a joint return, the spouse is jointly liable for the penalty.

You can expect the fee for the preparation of your tax return to increase as a result of the preparer’s additional responsibility for determining and calculating (if required) the penalty.

Calculating the Individual Shared Responsibility Penalty

The individual shared responsibility penalty is the lesser of:

1.  the sum of the monthly penalty amounts for each individual in the shared responsibility family for months in the tax year during which one or more failures to maintain minimum essential coverage occurred,
A. The monthly penalty amount is an amount equal to one-twelfth of the greater of:

1)  a flat dollar amount – which is the lesser of:

a) the sum of the applicable dollar amounts ($95 for 2014, $325 for 2015, and $695 for 2016) for all individuals over age 18 (1/2 the amounts for dependents under age 18) included in the taxpayer’s shared responsibility family, or

b) 300% of the applicable dollar amount (determined without regard to the special rule for individuals under age 18 for the calendar year with or within which the tax year ends).

2)  an excess income amount that is based on a percentage of income.

a)  the excess income amount is the excess of the taxpayer’s household income for the tax year over a threshold gross income amount multiplied by the income percentage. The threshold gross income amount is the amount of income required for an individual to file an income tax return for a particular year.

b)  the income percentage is:

       i.  1% for tax years beginning in 2013 and 2014,

      ii.   2% for tax years beginning in 2015, and

     iii.  2.5% for tax years beginning in 2016 and later years.

2.  the sum of the monthly national average premium for bronze-level qualified health plans that provide coverage for the applicable shared responsibility family. (Generally, a bronze plan is one that pays for 60% of the value of the benefits provided under the plan. The individual is responsible for the other 40% of costs.)

Examples

1.    For 2014, Jim and Judy have $125,000 of household income. They are uninsured all year.  Assume the threshold filing amount for Married Filing Joint is $19,500.

The applicable income is: $105,500 ($125,000 – $19,500)

The Penalty is $1,055 which is the greater of:

(Flat dollar amount) $95 x 2 = $190

(Excess income) 1% x $105,500 = $1,055

2.    Joe and Joan are married with three dependents, two under age 18. No insurance in 2014. The household income is $120,000 and filing threshold is $24,000. National Average Bronze Plan  premium is $20,000.

Flat dollar amount ($95 x 3 + $95/2 x 2) = $380

Not to exceed the maximum amount ($95 x 300%) = $285

Excess income amount (120,000 – 24,000) x 1% = $960

Penalty = $960 (Greater of $285 or $960 but not more than $20,000)

3.    Same facts as Example 2 above except it is now 2016.

Flat dollar amount ($695 x 3 + $695/2 x 2) = $2,780

Not to exceed the maximum amount ($695 x 300%) = $2,085

Excess income amount (120,000 – 24,000) x 2.5% = $2,400

Penalty = $2,400 (Greater of $2,085 or $2,400 but not more than $20,000)

4.   Gerald is single with no dependents. During 2014 he has insurance Jan-June. His household income is $120,000 and filing threshold is $12,000. National Average Bronze Plan premium is $5,000.

Flat dollar amount ($95 x 6/12) $48

Not to exceed the maximum amount (1 x $95 x 6/12)= $48

Excess income amount (120,000 – 12,000) x 1.0% x 6/12 = $540

Penalty = $540 (Greater of $48 or $540 but not more than $2,500)

Insurers and employers will have new reporting requirements beginning in 2015. Information regarding an individual’s health insurance coverage will be reported to the IRS (and to the individual) using new information reporting Forms 1095-B and 1095-C. The IRS intends to use a matching process similar to the process used for matching interest or dividend income reported on an individual’s income tax return with the amount reported to the IRS by banks and other payers. If an individual is not reported as having insurance coverage or being exempt from the penalty and does not report and pay the penalty when filing his or her individual income tax return, the IRS will correspond with the individual.

Posted by Don James, CPA, CFP

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About Don James, CPA/PFS, CFP
Don is the Tax & Financial Planning partner with Kiplinger & Co., CPAs headquartered in sunny Cleveland, Ohio since 1982. He partners with business owners and families and specializes in goal achievement solutions, tax minimization strategies and serves in the role of gatekeeper of sound financial advice.

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