Affordable Care Act: No tax refund, no penalty?

“How does the government plan to collect the penalty if you don’t have a tax refund?” 

South Dakota John

 Dear South Dakota John,

You have raised a great question that has a very interesting answer.  This tax or penalty is unlike any other that you are required to pay.  I’ll call it a penalty, though the Supreme Court’s decision on the individual mandate makes it clear that it is a tax.

First, even if you have no tax refund, the penalty/tax will apply.  When you fill out your forms, you will calculate your tax for not having health insurance.  So, it will show up in your bottom line – how much you owe or how much you have for a refund.   The law states, and I quote: “Any penalty imposed by this section with respect to any month shall be included with a taxpayer’s return . . .”  You can read the certified copy of the health reform law yourself, if you are interested.  (See page 248 – 249 for the parts I’m quoting.)

So far, it’s just like any other tax you would pay.  Then, it takes a twist.  For any other tax that you pay, the IRS can charge you penalties and even put a lien on your house or garnish your wages.  The Affordable Care Act specifically prohibits any liens or levies for this particular tax.   The IRS also cannot charge you a penalty for not paying your Affordable Care Act penalty.

Many have concluded that the penalty is toothless.  Insurers have worried that the penalty is too low to motivate people to buy health insurance.  Most people cite the $95 figure as the penalty, but that is the minimum.  The maximum is up to 1% of adjusted gross income, a mere pittance compared to the cost of health insurance.  Why not pay the (much cheaper) penalty – especially if the IRS can’t do much to get it from you?

The real reason to buy health insurance is to avoid having to sell your house, your car, and all that you own and love (think retirement accounts, college funds, rainy day/mad money) if you or a family member became seriously ill.

In the future, there may be other reasons to avoid having a bill pending at the IRS.  The IRS currently cannot report your unpaid bill to credit bureaus, but the GAO is reportedly investigating ways to make this happen.  This means your credit score would be affected.

In the meantime, make your decision about your health insurance based upon your need for protection from creditors.  The Affordable Care Act penalty is a side effect of your decision.

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Linda Riddell

About Linda Riddell

A published author and health policy analyst with 25 years’ experience, Linda Riddell's goal is to alleviate the widespread ailment of not knowing what your health plan can do for you.