Health Insurance Penalty for the 2018 Tax Year

What to Expect When Filing Your 2018 Tax Return

The overarching goal of the Affordable Care Act was to extend health insurance coverage to as many Americans as possible. In that regard, it's had significant success, with the uninsured rate dropping below 9 percent by 2016 (although it has increased again in 2017-2018). From 2010 through 2016, the number of people with health insurance in the U.S. has increased by roughly 20 million. 

But while access to health insurance is important, it's also important that people maintain their coverage going forward. Keeping as many people as possible in the risk pool—especially when they're healthy and not in need of immediate care—keeps premiums affordable. And while health insurance coverage is certainly not cheap, it would be far more expensive if people could just wait until they were sick before purchasing coverage.

Penalty for the 2018 Tax Year

The ACA has plenty of carrots in the form of guaranteed-issue coverage and subsidies to make coverage and care more affordable, including premium subsidies, and cost-sharing subsidies. But there's also a stick, in the form of a financial penalty for people who fail to maintain health insurance coverage throughout the year.

The penalty was implemented in 2014, and became progressively steeper through 2016. For 2017 and 2018, the penalty remained at the same level it was at in 2016. The penalty will be eliminated after the end of 2018, however, as a result of the Tax Cuts and Jobs Act (H.R.1) that was enacted in late 2017. But for 2018, the penalty still applies, just as it has since 2014.

The average penalty for people who were uninsured in 2015 was $470—up from $210 the year before. And according to preliminary data from the IRS, the average penalty was $667 for tax filers who owed the penalty for being uninsured in 2016 and who had filed their tax returns by early March, 2017.

Starting January 1, 2019, the penalty will fall away completely as a result of the Tax Cuts and Jobs Act of 2017. Still, anyone who was without health insurance in 2018 will be subject to the penalty when filing their 2018 tax return.

Exemptions to the Penalty

When filing your taxes, it is important to note that there are numerous exemptions from the penalty. One of them is a provision that allows people to have one short gap in coverage during the year. In order to be exempt from the penalty in 2018, there are a number of things you should know:

  • The gap in coverage had to be less than three months. As long as you have coverage for at least one day in the month, you're considered to have coverage for that month. So for example, if a health plan through a former employer was to end on the 15th of March (it's not a common scenario for a plan to end on a day other than the last day of the month, but it's possible), you could be uninsured for the rest of March, all of April, and all of May. But you'd need to have coverage in place for June in order to avoid the penalty. And individual health insurance is now only available with first-of-the-month effective dates (unless you have a new baby or adopt a child and are backdating the coverage to the date of the birth/adoption).
  • You are only allowed one gap each coverage year. So if you're uninsured for one month in June and then uninsured again for a month in September, you would not be exempt from the penalty in September.
  • Even if the only part of the gap was in 2018, you may still be penalized. Say that you were uninsured at the end of 2017 but not for long enough to trigger a penalty in 2017, the IRS will add that time onto the total length of your coverage gap if you remained uninsured at the start of 2018. So for example, if you were uninsured in November, December, January, and February, you wouldn't pay a penalty for 2017, since your coverage gap that year was only two months (assuming you were insured from January to October). But your 2018 coverage gap would start from November and would count as four months—meaning that you'll owe a penalty.
  • You cannot be penalized twice. Under the same scenario, if your gap in coverage at the end of 2017 was long enough that you did owe a penalty (for example, October, November, December), then your gap in coverage for 2018 would start counting as of January. As such, you won't be double-penalize for the same months. What you cannot do, however, is put two gaps of two months each back-to-back at the end or beginning of the year to avoid the penalty.

Ultimately, If you had a gap in coverage lasting less than three months, you can claim an exemption when you file your 2018 tax returns. However, if your gap was three months or longer, none of the uninsured months are exempt from the penalty.

Calculating Your Penalty

Calculating the penalty can often seem complicated. To put it into the simplest terms, if you were uninsured for all 12 months of 2018 the penalty would be the greatest of:

  • $695 per uninsured adult (half that amount for a child)
  • Up to $2,085 for the whole tax household
  • 2.5% of household income above the tax filing threshold

Whatever the greatest of the three amounts is what you would pay.

According to the IRS, the penalty for 2017 will be the same for 2018. Your prorated monthly penalty is 1/12th of the annual penalty.

If you have a gap in coverage of three months or longer (and are not eligible for an exemption), you will have to pay 1/12th of the total penalty times the number of months you were uninsured.

For example, if you are single tax filer who was without insurance for five months and are subject to the annual $695 penalty, simply divide $695 by 12 months ($695 ÷ 12 = $57.92) to get your monthly penalty.

You would then multiply $57.95 by the five months you were without insurance ($57.92 x 5 = $289.60) to calculate your penalty for 2018.

The penalty is collected when you file your tax return. If you are owed a refund, the IRS will subtract the penalty from that refund.

Rejection of Your Tax Return

Although the penalty's days are numbered, the IRS has actually stepped up enforcement of the penalty in 2018. When filing your 2018 tax return (due April 15, 2019), be aware that the IRS is no longer accepting returns that don't answer the question as to whether the tax filer had health insurance during the year.

If the question is not answered, your return will not be processed and you may be subject to late filing penalty fees.

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