Obamacare Tax Penalty: Does It Lack Teeth?

February 10, 2014 | By: TaxCure Staff

obamacare and individual mandateStarting in 2014, the individual mandate for health insurance coverage is in effect. Unless you meet the exemptions put forth by the government, you are expected to have minimal insurance coverage. For those who already have coverage through work, or through a government program like Medicaid or Medicare, the individual mandate doesn’t change much.

For those without insurance, though, Obamacare’s mandate can introduce a new factor to family finances. If you fail to get the insurance coverage you are required to get, you are supposed to pay a penalty. Right now, figuring the penalty is a bit complicated. But there is a dollar amount attached with each uninsured household member, stepping up over time. For 2014, the amount is $95, for 2015 the amount is $325, and in 2016 the amount is $695. Starting in 2017, the amount is adjusted for inflation. There are upper limits, though, that can keep your penalty from getting too out of hand.

However, once you look deeper, it becomes apparent that the Obamacare tax penalty lacks teeth.

Reporting Your Penalty

First of all, the IRS expects you to report any penalty you owe. So, if you haven’t got your required health insurance starting in 2014, you are supposed to make a note of it on your Form 1040. (This means that you will first report in 2015 for tax year 2014.

At first this seems like it might be a problem for some families, especially if they don’t want to get the health insurance coverage and don’t want to pay the penalty. However, even if you report the penalty on your tax form, it doesn’t mean that any action will be taken against you.

This is because, if you look at the Obamacare law, it is clear that the government subtracts unpaid penalties from tax refunds. So, in order to have the penalty affect you, a tax refund is required. If you don’t have a tax refund coming your way, the penalty doesn’t change anything.

On top of that, the IRS is not allowed to place a lien or levy on you if you don’t pay the penalty. So, the only way that the penalty is going to be enforced is if you have a tax refund coming. If your tax refund is smaller than the penalty you owe, the IRS can only take the amount up to your refund. So if, in 2015 you owe $325 for not being insured, but your tax refund is only for $250, the IRS can’t take more than the $250 that is the amount of your refund.

If you can arrange matters so that you don’t have a refund coming to you (usually a carefully calculated withholding on your W-4 can help with this), you can essentially avoid the individual mandate for insurance and not have to worry about a penalty.

Of course, choosing not to carry insurance comes with its own risks, beyond a potential tax penalty. With medical costs rising, you might be one illness away from financial catastrophe if you don’t have health insurance.