How to Avoid Paying the Health Insurance Penalty on Your Tax Return

November 8, 2017 | By: Kari Brummond

how to avoid paying the health insurance penaltyUnder the Affordable Healthcare Act, you are required to have health insurance. If you don’t, you face a hefty penalty at tax time. Although there has been a lot of news about changes to the healthcare act, you still have to pay this penalty for the tax year 2017.

Called a shared responsibility payment, this fee is the greater of 2.5 percent of your household income or $695 per adult and $347.50 per child up to a maximum of $2085. If 2.5 percent of your household income exceeds the yearly premiums for the national average cost of a bronze plan, your fee is equal to that amount.

How to avoid paying the health insurance penalty? Luckily, there are ways to avoid the fee. Here’s a look at the options.

Partial Exemption

If you had health insurance some months of the year, you don’t have to pay the full penalty. You only have to pay 1/12 of the annual fee for the months t. There’s also a short gap exemption—based on that rule, if you were only uninsured for three months or less, you don’t have to pay any penalty at all.

Not Required to File

If you are not required to file a tax return, you don’t have to pay the shared responsibility payment. For the tax year 2017, you don’t need to file a tax return if your income is less than the standard exemption unless you have $400 in self-employment income, you sold a house in the tax year, or you owe Medicare or Social Security on some of your earnings. To claim this exemption, you don’t have to send any particular forms to the IRS.

If you aren’t required to file, but you do so anyway, you can claim the exemption using Form 8965 (Health Care Exemptions). There’s a small box in Part II of this form. Tick that, and you’re done.

Hardship Exemptions

The IRS offers many different hardship exemptions. To claim one, you need to send an application to your state marketplace. Most require some proof. Here are the rest of the possible hardship exemptions and an explanation of the supporting documents you need to include with your application:

  • Eviction or foreclosure—the notice from your bank or landlord.
  • Utility shut-offs—a notice from your electricity, gas, or water company, that says your service was or will be shut off.
  • Fire or natural disasters—a record from the police or fire department, a copy of an insurance claim, a news article, or any other documents related to the event.
  • Death of a close relative—death certificate, military or other official death notice, copy of a newspaper obituary, program from the funeral, or a coroner’s report.
  • Bankruptcy—court documents from your bankruptcy filing.
  • Unaffordable medical expenses—copies of your medical bills or receipts including transportation expenses.
  • Unexpected and unaffordable expenses while caring for a family member who is ill, disabled, or aging—medical bills or receipts.
  • Homelessness—no proof required.
  • Domestic violence—no proof required.

In addition to the above list, if you had a plan prior to March 23, 2010, canceled due to the ACA, you can also claim an exemption. Finally, if your hardship is not listed above, you can write in a hardship and see what the marketplace says.

Typically, it takes about four weeks to review exemption applications. You will receive an exemption certificate number (ECN) once your application is approved. You need this number when completing your tax return.

Residents of States That Didn’t Participate in the Medicaid Expansion

As part of the ACA, states received additional federal funding for their Medicaid programs, but some chose not to participate. As a result, some of their citizens ended up without coverage.

You can claim the exemption if you would have qualified for Medicaid if your state would have accepted the expansion. This exemption applies to residents of Alabama, Alaska, Florida, Georgia, Idaho, Kansas, Maine, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, and Wyoming.

Your income must have been less than 138% of the federal poverty level. For the tax year 2017, that’s $33,948 for a family of four. To claim this exemption, you can apply through your marketplace, or you can just note the exemption on your tax return as explained below.

Another Person Is Responsible for the Health Care Costs of a Child Claimed on Your Tax Return

If you claim a child as a dependent on your tax return, but another person is responsible for the child’s healthcare costs, you can claim a penalty exemption for that dependent. To do that, you need a court order showing that another person is responsible. You also need a denial notice from either the Medicaid or Children’s Health Insurance Program (CHIP).

Lapse in Coverage Due to Marketplace Appeal

If you don’t have coverage because you were appealing the marketplace about a decision regarding your eligibility, you can also claim an exemption. In this case, you need to have been eligible for a qualified health plan through the marketplace or for tax credits to lower your monthly premiums, and you need a copy of your appeal.

How to Fill Out the Hardship Exemption Form

You can download this form from the IRS’s website. You need Adobe Acrobat to open the form. Then, you can fill it out online, print it, and mail it to the address listed in the instructions.

The hardship exemption form is straightforward. It requests basic details (name, address, social security number) about you, your spouse, dependents, and anyone else claimed on your tax return. Then, there is a chart where you list the hardship exemptions and the months for which you are applying. Finally, you need to include supporting details or proof as listed above.

If your filing status is “married filing separately,” you can’t use the same exemption application form. You have to do one for each of you. Otherwise, you usually just need one form per household.

Affordability Exemptions for the Health Insurance Penalty

You can also apply for an exemption if health care plans in your area are unaffordable. To qualify for this exemption, the lowest-priced coverage available to you must be more than 8.16 percent of your household income. That applies to plans from the Marketplace or through your employer.

For instance, if your household income is $50,000, you can qualify for this exemption if the cheapest plans available to you cost more than $4,080 per year or $340 per month. For this calculation, the IRS uses your modified adjusted gross income (MAGI). If you have dependents who also file a tax return, you have to add their MAGI’s to this number.

How to Apply for an Affordability Exemption

You can apply for this exemption through the marketplace. There is one form for states with a federally facilitated marketplace. Moreover, there is another application for residents of California, Colorado, District of Columbia, Idaho, Maryland, Massachusetts, Minnesota, New York, Rhode Island, Vermont, and Washington.

These two forms request very similar information. In addition to basic information about you and your family, you need to provide details about your income. That includes wages from your job, retirement plan payments, rent from investment properties, alimony, and taxable social security income. Then, you get to list some deductions such as IRA contributions, alimony that you pay to an ex, and student loan interest.

You also have to answer questions about pregnancy, tobacco use, and citizenship status. Finally, you have to include the prices of plans from your employer or the marketplace. If you applied for coverage through the marketplace, you need to include your notice of eligibility. That should include details on tax credits for which you are eligible. Finally, you need proof of insurance plan costs—screenshots w.

Make sure your state is at the top of the form to ensure you’re filling out the right paperwork.  Mail the completed paperwork to the address on the form.

If you don’t complete these forms, that’s okay. You can apply for an affordability exemption directly on your tax return without applying through the marketplace. There are more details on that process below.

Appealing Healthcare Exemptions Denials

Whether you apply for a hardship exemption or an affordability exemption, you have the right to appeal if your application is denied. However, you must appeal within 90 days.

Additional Exemptions for the Healthcare Penalty

If you fall into any of the following categories, you can also claim an exemption.

  • Incarcerated or in jail
  • Living out of the country
  • Member of a federally recognized tribe
  • You are eligible for health care through Indian Health Services.
  • Member of a recognized health care sharing ministry.
  • You belong to a recognized religious sect that objects to insurance including Social Security and Medicare—for example, the Amish.
  • You gave birth to or adopted a child. This exempts you for the month of the event and the month following the event.
  • An individual in your tax household died. This qualifies you for an exemption during the month of death and the following month.

You can just note these situations on your tax return; you don’t have to apply to the marketplace.

Claiming the Exemption on Your Tax Return

To claim these exemptions you need to use Form 8965. The easiest way to complete this form is to hand it to your accountant along with a copy of your exemption approval from the marketplace and any other supporting details you have. If you are using tax software, it will prompt you to put in the necessary details.

Otherwise, this form is relatively easy to fill out on your own. If you have applied to the marketplace for an exemption, note that in Part 1 of Form 8965. You need to include the individual’s name and social security number as well as the exemption certification number (ECN) that you receive from the marketplace.

Part 2 of this form is for people who don’t need to file but are choosing to file a tax return anyway. As indicated above, you just tick the exemption box in this section.

If you are claiming an exemption for something that doesn’t require an ECN, you need to fill out Part 3 of this form. Consult the instructions for this form and find the letter code that applies to your exemption. For example, if you were living abroad, note letter “C,” if you adopted a baby, use the letter “H,” and so on.

There are some overlaps between exemptions that require marketplace approval and exemptions you can just claim on your return. For instance, if you are claiming an exemption because coverage was unaffordable, you can claim that in Part 1 with an ECN, or you can report that exemption in Part 3 using code letter “A.”

If you are uninsured, the penalty can be expensive. To avoid this fee, it’s critical that you figure out a possible exemption strategy and complete the required paperwork. If you need to get approval from the marketplace, you should apply as soon as possible, so you have the details you need when it’s time to fill out your tax return in early 2018.