Low Income Earners and the Individual Mandate Insurance Penalty

Patient handing health insurance card across counter at a doctor's office

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The individual mandate health insurance penalty imposed by the Affordable Care Act (ACA) is in its waning days on the federal level. It doesn't matter if you're low income, high income, or if you fall somewhere in between—the 2017 Tax Cuts and Jobs Act (TCJA), signed into law on December 2017, dealt the penalty a death blow. The ACA itself is still alive and well, but the TCJA reset the penalty to zero and effectively eliminated it. 

This penalty-free federal provision of the TCJA became effective at the end of 2018. Tax filers still had to deal with it in tax years 2017 and 2018, but you might dodge it if your income is below certain thresholds. However, according to "HealthInsurance.org", if you live in certain states you may still be assessed a state-level penalty if you are without coverage.

A Provision for Low-Income Taxpayers

You're exempt from the health insurance penalty, called the shared responsibility payment if your income is less than the amount that requires you to file a tax return. The IRS won't fine you for not having health insurance.

If you do file a tax return—perhaps to claim a refund of taxes you paid in during the year—you can indicate on Form 8965 that you qualify for an exemption from the shared responsibility payment. Attach the form and send it to the Internal Revenue Service along with your tax return. The IRS doesn't care in this case whether your health insurance qualifies as minimum essential coverage under the Affordable Care Act.

"If you are not required to file a tax return," the IRS says, "your tax household is exempt from the shared responsibility payment and you do not need to file a tax return to claim the coverage exemption. However, if you are not required to file a tax return but choose to file anyway, claim the coverage exemption on line 7 of Form 8965."

What Does This Mean on Your Tax Return? 

If you're not required to file a tax return but you do, you have two options.

If you had health insurance for all 12 months of the year, you can check the appropriate line of your tax return to indicate this. It's Line 61 of Form 1040, Line 38 of Form 1040A, and Line 11 of Form 1040EZ. This signals to the IRS that the shared responsibility payment wouldn't apply even if you weren't exempt because you did indeed have health insurance. 

If you did not have health insurance coverage for the full year, you can simply tell the IRS that the shared responsibility payment does not apply to your situation. Fill out Form 8965 and check the box on Line 7 indicating that you're claiming a coverage exemption because your income is less than the tax filing threshold. 

The IRS might not know just by looking at your tax return whether you're required to make the shared responsibility payment. You don't want the IRS and their computers guessing about your situation because when the IRS makes guesses, it usually means you're going to pay more tax. Protect yourself by telling the IRS exactly what's going on by taking one of these two steps.  

Other Exemptions

The ACA offers other exemptions for low-income taxpayers as well so if you earn just a little over the tax filing threshold, all is not necessarily lost. 

The IRS Instructions for Form 8965 provides a full list of possible exemptions available to all taxpayers. Some come with a code letter that you can enter on Form 8965 in Part III if you can't check off box 7. For example, members of certain Indian tribes and religious sects are exempt, as are taxpayers who were incarcerated during the tax year and those who have suffered hardship during the tax year

And some exemptions apply specifically to taxpayers who simply could not afford coverage for one reason or another. You can choose Code A or Code G if the insurance available to you through your employer required premiums paid by you that would have exceeded 8.16 percent of your household income.

You can also use Code G if your state did not expand Medicare coverage and your income for the year was below 138 percent of the federal poverty line based on the size of your family. 

If You Don't Qualify for an Exemption

The law doesn't allow the IRS to impose levies or liens to collect unpaid shared responsibility payments. The IRS can do little about it if you pay any tax debt you owe but you can't scrape together more money for the penalty—at least not in the current tax year. It can, however, subtract the penalty from any future refunds you're entitled to or any other over-payments that you make.