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Not enrolling in Obamacare will hit home at tax time

The linchpin of the federal health care overhaul is a tax penalty for going without insurance. Here's what you should know.

By Marcia Frellick, Special to the Tribune

March 26, 2014

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Health care navigator Barb Silnes has been warning consumers that they will pay a tax penalty if they don't sign up for insurance very soon.

Some reply that they'll swallow the penalty — and maybe get coverage later this year.

But in most cases that won't be possible, Silnes tells them. If consumers miss their chance to enroll this time around, the next chance is mid-November, with a few exceptions.

"That's when I get their attention," said Silnes, who works out of the Jane Addams Resource Corp. in Chicago's Ravenswood neighborhood.

The Obama administration has long said that consumers must enroll in a health insurance plan by March 31 or face financial consequences. On Tuesday evening, the Washington Post reported that federal officials had granted applicants a little more breathing room. People who have begun to apply for coverage on the HealthCare.gov federal marketplace site, but do not finish in time, will have until about mid-April to ask for an extension.

But the basic equation doesn't change: Decisions made now on health insurance have an impact that stretches to tax time 2015.

The mandate that most people obtain insurance or pay a penalty is the linchpin of the federal health care overhaul. Without it, younger, healthier people might not enroll in high enough numbers to compensate for those who have preexisting conditions, who often cost the system more.

The Supreme Court focused on the tax penalty in its decision upholding the Affordable Care Act in 2012, ruling that while the federal government does not have the constitutional power to require people to buy insurance, it can levy a related tax.

For consumers, the flip side of the tax penalties is the law's tax benefits. To make insurance more affordable, the law qualifies most low- to moderate-income people for government credits that can be used to lower the cost of monthly premiums of plans obtained through the federal or state insurance marketplaces.

The basic penalty for going without insurance is $95 or 1 percent of modified adjusted household income, whichever is higher. But many complicating factors can increase the burden.

"The $95 thing is a myth for most folks," said Brian Haile, senior vice president for health policy with Jackson Hewitt Tax Service, which has made it a point of business strategy to help its customers avoid the law's tax penalties. He said most uninsured people will pay much more.

"If you choose not to get insurance, we respect that choice, but what we absolutely want to ensure is that you're not surprised," Haile said.

The mandate to buy insurance remains politically controversial. Some Republican members of Congress have argued that it has too many exceptions to be effective, including 14 hardship exemptions such as having a recent death in the family, being a victim of domestic abuse, being unable to pay medical expenses in the past 24 months or having a policy canceled and considering the available options unaffordable.

This month House Republicans voted to delay the so-called individual mandate by five years, though such legislation wouldn't survive the Democrat-controlled Senate or Obama's promised veto.

Here's what you should know about tax penalties and credits as you make your insurance choices:

Some groups are exempt from the penalty. Those include people for whom the cost of health insurance would exceed 8 percent of household income in 2014, prison inmates, members of an Indian tribe or certain religious faiths with objections to insurance, people whose income is too low for them to file a tax return, people living in the U.S. illegally and those who qualify for a hardship exemption.

If just one member of your family isn't covered, penalties apply. According to Haile, for a family of five with one uninsured adult whose modified adjusted gross income is $68,000, the penalty would be $477 for the first year. For example, a "boomerang" son or daughter age 26 or older has moved back home. Claiming that uninsured person as a dependent on your taxes could "cost you more than a spare bedroom," Haile said.

Penalties get worse each year. For 2014 the tax penalty is 1 percent of modified adjusted household income or $95 per adult and $47.50 per child (up to a maximum of $285 per family), whichever is more. In 2015 penalties rise to 2 percent of income or $325 per adult and $162.50 per child; in 2016 and beyond it will be 2.5 percent or $695 per adult and $347.50 per child. (Higher maximum penalties will apply.) An online calculator that helps determine the likely penalty is available at taxpolicycenter.org.

Missing next year's deadline means a double whammy. Your actions this spring seal your fate for the 2015 tax season. But if you also don't sign up in the next enrollment period, from Nov. 15 to Feb. 15, "you are locking yourself into two years of penalties," said Mark Ciaramitaro, vice president of health care enrollment services for H&R Block. If a taxpayer doesn't realize that until next April, it will then be too late to buy a policy.

Many insurance buyers will qualify for tax credits. The credits, which vary according to income and family size, can go directly to the insurer, reducing your monthly bills. Or you can pay the full premium and get a lump sum as part of your tax refund next year. For a family of four, incomes from $23,550 to $94,000 may qualify.

The income criteria are based on the modified adjusted gross income listed on 2013 tax forms and an estimate of this year's pay. If you guess too high on your 2014 income, you will wind up paying too much for your insurance and will get some money back when you settle up at tax time next year. If you guess too low, you may have to pay more.

"A lot of people seem to be thinking, I'm going to put my income as low as possible to get the highest credit I can and the government won't know. Yes, the government will figure it out and will adjust your tax refund next year," Ciaramitaro said.

Haile said the people who face the biggest decisions about whether to buy insurance that comes with tax credits are those near the income limits.

Say your family of four's income is $94,000, so you barely qualify for monthly credits to help with payments. Then you get an unexpected $400 bonus. "It could be the most expensive bonus you ever receive," Haile said, because it could push you over the limit for receiving credits and you may have to pay them back.

The law does set some limits on what a person must pay back if family income exceeds estimates. For example, a family at 300 percent of the federal poverty level ($71,550 for a family of four) would have to pay back a maximum of $2,500. But there is no such cap if, by the end of the year, income is over 400 percent of the poverty level.

The credits may even come into play when two people are deciding whether to get married, Haile said. If their combined incomes on a joint return put the couple over the limit, they would miss out on the monthly help with premiums they could have gotten individually.

What almost everyone agrees on is that the tax implications are complicated. That's where the navigators come in, and they are stepping up their outreach activities as time runs out to sign up.

Tim van Alstyne, a navigator with Community Counseling Centers of Chicago, said his appointments and phone consultations have been ramping up for weeks. He said there is much confusion about the penalties but he tells people that between the state's broader Medicaid options (thanks to its decision to expand the program) and the available tax credits, "no one really has to pay a penalty."

In addition to the newly allowed extension, there are other exceptions to the March 31 deadline. People experiencing life changes that affect their insurance status — such as marriage, divorce or loss of a job that provided coverage — will be able to buy a health plan later in the year. And people who qualify for Medicaid can enroll at any time.

Steve Mullen, 56, who lives in the Old Irving Park neighborhood, had been uninsured since his COBRA eligibility ran out in June. He knew he wanted to sign up for new insurance under the law, he said, but put it off until this month for financial reasons.

After meeting with Heartland Health Centers navigator Felicia Fredricks for just under an hour and a half, Mullen found a plan for himself and his wife with tax credits. He said Fredricks helped him with tax information he wouldn't have known.

"Had I not worked with Felicia, I would have made a big mistake," he said, in reference to questions about filing jointly. "I didn't realize how closely the Affordable Care Act and your tax filing status were connected."

Vivian Ezeji, another navigator for Heartland, says she's getting questions about how to project income accurately to determine tax credits when a person's pay changes from month to month. Consumers are required to report changes in pay or family size to the marketplace so credits can be adjusted, she noted.

Information on finding a navigator is available at localhelp.healthcare.gov.

A number of companies are using tax season to raise awareness about health insurance options. In addition to materials available through Jackson Hewitt, H&R Block is partnering with Chicago-based insurance portal GoHealth to help people get coverage; options are laid out at hrblock.com/healthcare. TurboTax is working with eHealthInsurance.com, a private online national exchange.

Illinois residents also can compare plans and enroll directly through HealthCare.gov.

This story was produced in partnership with Kaiser Health News, an editorially independent program of the Kaiser Family Foundation.