The core provisions of the Affordable Care Act (ACA), aka “Obamacare,” are now coming into effect. The health insurance exchanges went live at the beginning of this month and the personal mandate to have health insurance goes into effect January 1, 2014. The penalty connected to that mandate is widely misunderstood and has been incorrectly reported.
In 2014, the penalty is $95 or 1% of taxable income, whichever amount is more. By 2016, the penalty will rise to $695 ($2085 for jointly filing spouses) or 2.5% of income, again whichever is higher. The penalty, however, is a hybrid. And just like the ability of the Toyota Prius or other hybrid cars to fight global warming is debated, so too there is doubt about whether or not this penalty really has teeth.
For most tax related penalties, the IRS has the legal authority to garnish wages and file liens in order to collect those amounts. The IRS is unable to do so with the ACA penalty, however. The personal mandate penalty is only taken out of your Federal tax refund. If you had no tax refund, the IRS would not be able to collect the penalty. Moreover, while there are penalties for failure to pay taxes, there are no penalties on failure to pay other penalties. This does not mean, however, that you can carry such a penalty indefinitely. You never know when the need will arise to show you have no open liabilities on your taxes to the IRS.
There is something else very important to keep in mind here (aside from the fact that living without health insurance is probably not advisable). If someone in tax year 2014 has no health insurance and is thus subject to the $95 penalty but has no tax refund, the IRS will not collect the penalty, since they can only deduct it from a refund, but the penalty is still due. And like all other outstanding amounts owed to the IRS, that penalty will continue to accrue interest. The IRS interest is currently low, 3%, but it has risen much higher historically and could do so again. $95 could become very unwieldy if left unaddressed for five or ten years.
Horowitz Law Offices has helped numerous taxpayers navigate their specifc tax situations and deals regularly with the Internal Revenue Service, the Illinois Department of Revenue, and the Chicago Finance Department. You are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org