When talking about the shared responsibility penalty individuals will pay if they choose not to purchase health insurance in 2014, a lot of agents are saying “it’s just $95.” That’s not quite right. It’s actually $95 per adult or 1% of household income, whichever is greater, pro-rated based on the number of months the individual went without coverage. Here’s how it works:

**1) First, calculate the per-person penalty.**

The penalty is $95 per adult and $47.50 per child with a cap of $285 per family. Basically, the government has capped the amount a family would pay under the per-person penalty calculation based on the penalty a family of four with two parents and two children would pay.

$95 + $95 + $47.50 + $47.50 = $285.

In 2015, the per-person penalty goes up to $325 per adult and $162.50 per child with a cap of $975 per family and in 2016 it goes up to $695 per adult and $347.50 per child with a cap of $2,085 per family.

**2) Next, calculate the percentage-of-income penalty.**

The penalty for 2014 is 1% of the household income with no cap. However, the household income used in this calculation is reduced first by the standard deduction amount ($6,200 for single filers or married filing separately and $12,400 for married filing jointly in 2014) and then by the personal exemption amount ($3,950 in 2014).

So, for a family of 4 with two parents and two tax-dependent children with a household income of $60,000 in 2014, the penalty would be calculated as follows:

$60,000 – $12,400 (the standard deduction) – $15,800 (the personal exemption amount x 4 exemptions) = $31,800.

$31,800 x 1% = $318

In 2015, the percentage-of-income penalty goes up to 2% of household income with no dollar cap and in 2016 it goes up to 2.5% of household income with no dollar cap.

**3) Pick the biggest number**

For 2014, the percentage-of-income calculation yields a bigger penalty than the per-person calculation, so the penalty for this family will be $318. In 2015, though, the per-person calculation of $975 will yield a bigger penalty than the percentage-of-income calculation of $636, so that penalty amount will apply.

**4) Pro-rate the penalty based on the number of months without coverage**

If the family had health coverage for 6 months of the year and was uninsured for 6 months of the year, then the $318 penalty would be reduced by 50% for a total of $159.

If the family had a single gap in coverage of 3 months or less (which equals the maximum new-hire waiting period on a group plan), then no penalty will apply.