Those Americans who didn’t get health insurance last year could be in for a rude awakening when the IRS asks them to fork over their Obamacare penalty — and it could be a lot more than the $95 many of them may be expecting.
The Affordable Care Act requires those who didn’t have insurance last year and didn’t qualify for one of the exemptions to pay a tax penalty, which was widely cited as $95 the first year. But the $95 is actually a minimum, and middle- and upper-income families will actually end up paying 1 percent of their household income as their penalty.
TurboTax, an online tax service, estimated that the average penalty for lacking health insurance in 2014 will be $301.
“People would hear the $95, quit listening, and make an assumption that that was what their penalty was going to be,” said Chuck Lovelace, vice president of affordable care for Liberty Tax Service. “I think that a lot of people will be surprised when they get in there and find out that their penalty is [based] on their household income.”
The penalty is designed to prod Americans to buy insurance and the penalty for not having it is scheduled to rise considerably: to a $325 minimum or 2 percent of income in 2015, and to a $695 minimum or 2.5 percent of income in 2016.
Tax experts said those stung by a higher penalty the first year may buy plans to escape the penalty the next go-around.
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“We will be showing them what the penalty is,” said Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block, said of this year’s customers. “But we will also be telling them, ‘How do we not go down this road next year?’”
The tax industry and government officials have been trying to prepare filers for the changes since the Affordable Care Act was signed in 2010, but tax preparers still expect to get strange looks when they inquire about their customers’ health insurance.
“You might think it’s a question that a tax preparer shouldn’t be asking, but we have to ask that,” Ms. Perlman said.
Tax experts said mixing Obamacare with the annual tax filing season is a major adjustment, and it comes even as the IRS, blaming budget cuts, says it won’t be able to even answer a majority of help calls, and those who do get through will have to wait an average of 30 minutes.
Gearing up for the challenge, Treasury Secretary Jacob Lew and Health and Human Services Secretary Sylvia Mathews Burwell spoke to more than 100 volunteer tax preparers Friday.
Most taxpayers will only have to check a box asserting they had their own insurance, usually through their employer. But those who bought insurance on the Obamacare exchanges with the help of federal subsidies will have to reconcile their payments with their income level.
Some people will get money back, although those who failed to report raises or bonuses to their respective health exchanges will pay back some amount of subsidy.
HealthCare.gov, the federal exchange that serves 37 states, started to mail out 1095-A forms to customers last week, and state-run exchanges say they will meet the end-of-month deadline to postmark theirs.
But the subsidies were paid directly to insurers, and not the Obamacare customer, so filers might not remember them or realize they need the form.
It’s a short wait for the 1095-A — about two weeks — but tax experts fear some taxpayers, looking to get a jump on the process and with a W-2 already in hand from their employers, will file without waiting for the Obamacare form, causing problems and delaying their refund.
“Hopefully, we’ve communicated that to our customers,” Mr. Lovelace said. “But as a general rule, I’m not sure that the population out there is understanding it.”
Filers who ignored the exchanges, or couldn’t get insured through government programs or a job, may qualify for an exemption from the individual mandate and avoid penalties.
Some of the exemptions are baked into the law — ones for prisoners, members of Indian tribes or the Amish, for example — while others may qualify for far-reaching “hardship exemptions” from the Obama administration.
Mark Steber, chief tax officer for Jackson Hewitt Tax Service, noted that filers can only apply for certain exemptions on their actual tax forms, making it one of the trickier aspects to navigate under Obamacare.
Someone who doesn’t take advantage of an exemption will end up paying more than they should.
“I would say the exemption area is one opportunity for missteps,” Mr. Steber said, “both by a taxpayer or a tax preparer.”