Now that Affordable Care Act (ACA) repeal and replacement efforts appear to have ended, it’s a good time for a refresher on the ACA tax penalty for individuals who do not have the “minimum essential” health insurance coverage for any month of the year.

Affordable Care Act Penalty Exemptions 
Before we review how the penalty is calculated, let’s take a quick look at exceptions to the penalty. Taxpayers may be exempt if they fit into one of these categories for 2017:

  • Their household income is below the federal income tax return filing threshold
  • They lack access to affordable minimum essential coverage
  • They suffered a hardship in obtaining coverage
  • They have only a short-term coverage gap
  • They qualify for an exception on religious grounds or have coverage through a health care sharing ministry
  • They’re not a U.S. citizen or national
  • They’re incarcerated
  • They’re a member of a Native American tribe

Calculating the ACA Tax Penalty
The real question most taxpayers have is how much the penalty can really cost them, and here is where things can get confusing. If you owe the penalty, the tentative amount equals the greater of the following two prongs:

  1. The applicable percentage of your household income above the applicable federal income tax return filing threshold, or
  2. The applicable dollar amount times the number of uninsured individuals in your household, limited to 300% of the applicable dollar amount.

In terms of the percentage-of-income prong of the penalty, the applicable percentage of income is 2.5% for 2017.

In terms of the dollar-amount prong of the penalty, the applicable dollar amount for each uninsured household member is $695 for 2017. For any household member who’s under the age of 18, the applicable dollar amounts are cut by 50%, to $347.50. The maximum penalty under this prong for 2017 is $2,085 (300% of $695).

The final penalty amount per person can’t exceed the national average cost of “bronze coverage” (the cheapest category of ACA-compliant coverage) for your household. The important thing to remember is a high-income person or household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage.

If you have minimum essential coverage for only part of the year, the final penalty is calculated on a monthly basis using prorated annual figures.

Also, be aware the extent to which the penalty will continue to be enforced isn’t certain. The IRS has been accepting 2016 tax returns even if a taxpayer hasn’t completed the line indicating health coverage status. With this said, the ACA is still the law, so compliance is highly recommended. Contact your advisor for more information about the ACA penalty and other ACA-imposed taxes.