When calculating my tax penalty for not having health insurance, do I use my gross income or my take-home pay? It seems unfair to use gross income if $7,000 went to pay taxes.
Uninsured but savvy
Dear Uninsured but savvy,
According to the IRS, the tax penalty is calculated as follows:
For 2014, the annual payment amount is:
- The greater of:
- 1 percent of your household income that is above the tax return filing threshold for your filing status, or
- Your family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285,
- But capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014. For 2014, the annual national average premium for a bronze level health plan available through the Marketplace is $2,448 per individual ($204 per month per individual), but $12,240 for a family with five or more members ($1,020 per month for a family with five or more members). See .
Calculating your payment requires you to know your household income and your tax return filing threshold.
- Household income is the adjusted gross income from your tax return plus any excludible foreign earned income and tax-exempt interest you receive during the taxable year. Household income also includes the incomes of all of your dependents who are required to file tax returns.
- Tax return filing threshold is the amount of gross income an individual of your age and with your filing status (e.g., single, married filing jointly, head of household) must make to be required to file a tax return.
If you are paying $7,000 in taxes then the tax return filing threshold is not relevant to you. This is the minimum amount a person must earn in order to be required to file a tax return at all.
Taxes paid are subtracted from your gross income, plus any other deductions that you qualify for (child care, college tuition, medical expenses, etc) to get to your adjusted gross income.
The IRS has also set maximum penalties based upon the cost of a bronze (lowest level) health plan available to you. Even if 1 percent of your income is higher than the cost of a bronze plan, you will pay the cost of a bronze plan. In other words, it would have been cheaper to buy a bronze plan than to pay the IRS the tax (and get nothing for it). Your income would have to be quite high for this to be the case: an average bronze plan costs $12,000 a year for a family. If 1 percent of your income is more than $12,000, you probably have enough assets and cash to buy health insurance anyway.