The New Tax Forms – Calculating the Individual Shared Responsibility Penalty (Part 3 of 4)

(This is the third post in a four-part series about the new tax forms. Read part one here and part two here.)

Individuals and families who were uninsured for one or more months in 2014 and who do not qualify for an exemption will pay a shared responsibility penalty when they file their taxes. However, there’s not a separate form to complete; instead, taxpayers can use the worksheets included in the instruction booklet for Form 8965, the same form used when applying for an exemption, to calculate their penalty.

Minimum Essential Coverage

The booklet explains that the individual mandate requires people who don’t qualify for an exemption to have minimum essential coverage or pay a tax penalty and defines minimum essential coverage as “health coverage that satisfies the individual shared responsibility provision. Minimum essential coverage generally includes coverage under a government-sponsored program, coverage from your employer, a plan that you buy in the individual market, and certain other coverage.” A chart is also provided to illustrate the various types of minimum essential coverage.

types of mec chart

Shared Responsibility Payment Worksheet

If a taxpayer or someone in his tax household “had neither minimum essential coverage nor a coverage exemption for any month during 2014,” he’ll use the Shared Responsibility Payment Worksheet to figure the family’s shared responsibility payment and will then enter the amount from line 14 of the worksheet on Form 1040, line 61; Form 1040A, line 38; or Form 1040EZ, line 11. This is an additional tax that will be added to the “tax owed” section of the tax return.

shared responsibility payment worksheet

What the Shared Responsibility Payment Worksheet is designed to do is determine, on a month-by-month basis, whether the flat dollar calculation or the percentage of applicable income is greater.

Applicable income is the taxpayer’s household income minus the filing threshold. As the below chart indicates, the filing threshold is different based on the taxpayer’s age and filing status. When completing the Shared Responsibility Worksheet, the taxpayer subtracts his filing threshold amount from his household income and multiplies that by 1%, but it is capped at $204 per family member with a limit of 5.

filing threshold chart

The flat dollar penalty under the individual mandate is $95 per adult and $47.50 per child with a cap of $285 per family for the whole year. It would only apply if the percentage of applicable income is less than $285, and if it is the taxpayer would use the Flat Dollar Calculation Worksheet to determine the actual penalty.

flat dollar amount workseet

We know this is confusing, but then again, you won’t be doing the taxes for your clients. The whole purpose of showing you this is to illustrate how complicated calculating the penalty can be. If the penalty itself is not enough of an incentive for people to buy health insurance, perhaps the Shared Responsibility Worksheet will be. It is important for brokers who sell individual health insurance to remember that they are not tax professionals and should not be helping someone with their taxes. But knowing that a penalty will apply to anyone who is uninsured for one or more months and does not have an exemption for the month; that the penalty is the greater of a flat dollar amount or a percentage of applicable income, determined on a monthly basis; that the penalty is calculated by completing a worksheet and then transferring the result to the tax return; and that any penalty will reduce the taxpayer’s income tax refund or increase the amount they owe the government is probably enough. Hopefully this short tutorial helps.

In our final post, we’ll take a look at the reconciliation process for individuals who received an advance premium tax credit in 2014.
NOTE: If you don’t yet sell individual health, you should! The individual market is growing, and brokers who are able to help individuals choose a health plan and apply for a subsidy quickly and easily without going through or a state exchange have a huge opportunity. Learn more here.

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