Can You Go Without Health Insurance and Not Owe a Penalty?

Health Insurance: What to Expect When Filing Your Tax Return

The overarching goal of the Affordable Care Act (ACA) 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% by 2016 (although it started to increase again in 2017-2018). From 2010 through 2016, the number of people with health insurance in the U.S. 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.

Federal Penalty Applied From 2014 Through 2018

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 for several years there was 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. The average penalty for people who were uninsured in 2015 was $470—up from $210 the year before. And according to data from the IRS, the average penalty was $708 for tax filers who owed the penalty for being uninsured in 2016.

For 2017 and 2018, the penalty remained at the same level it was at in 2016. But the penalty was eliminated after the end of 2018, as a result of the Tax Cuts and Jobs Act (H.R.1) that was enacted in late 2017 (for 2018, the penalty still applied, just as it had since 2014, so people who were uninsured in 2018 had to pay the penalty when they filed their tax returns in early 2019).

So people who are uninsured in 2019 are not subject to a federal penalty. They're still stuck without health insurance if they end up needing medical care, and won't have an opportunity to enroll in coverage until the annual open enrollment period (unless they experience a qualifying event), but they won't have to send the IRS a penalty payment when they file their 2019 federal tax return in 2020. However, there are a few states that have implemented their own individual mandates, with penalties for residents who are uninsured in 2019 and future years.

Starting January 1, 2019, there is no longer a federal penalty as a result of the Tax Cuts and Jobs Act of 2017. But there are some states that have their own penalties for people who are uninsured in 2019 and future years.

States Where There Is Still a Penalty

In 2019, there's a penalty for being uninsured if you're in DC, Massachusetts, or New Jersey. These penalties will be assessed on state tax returns (or district return, in the case of DC), starting in early 2020. Massachusetts has had an individual mandate penalty since 2006, although they didn't double penalize people who were uninsured between 2014 and 2018 and subject to the federal penalty. But they'll start assessing penalties again as of 2019, since there is no longer a federal penalty.

California lawmakers are considering an individual mandate with an associated penalty. If approved by lawmakers, it would take effect in 2020.

Vermont will implement an individual mandate as of 2020, requiring state residents to maintain coverage. But lawmakers have designed the program so that there is no penalty for non-compliance with the mandate. Instead, the information people report on their state tax return (indicating whether or not they had coverage during the year) will be used for the state to conduct targeted outreach to help people obtain coverage and understand what financial assistance might be available to offset the cost.

Individual Mandate Exemptions: Still Important if You Want a Catastrophic Plan

Although there is no longer a federal penalty for being uninsured, the process of obtaining a hardship exemption from the individual mandate is still important for some enrollees. If you're 30 or older and want to buy a catastrophic health plan, you need a hardship exemption.

You can obtain the hardship exemption from the health insurance exchange (instructions and information are available here), and you'll need the exemption certificate in order to enroll in a catastrophic health plan. These plans are less expensive than bronze plans, although you can't use premium subsidies to offset their cost, so they're really only a good choice for people who don't qualify for premium subsidies.

Although there is no longer a federal penalty associated with the individual mandate, you still need to obtain a hardship exemption from the mandate if you're 30 or older and you want to buy a catastrophic health plan.

Calculating Your Penalty: Tax Returns for 2014 Through 2018

If you were uninsured in 2018 and haven't yet filed your tax return (or if you're filing a return for a previous year), you might be wondering how much your penalty will be. To put it into the simplest terms, if you were uninsured for all 12 months of 2018 the penalty would be the greater of:

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

Your penalty is based on whichever calculation results in the larger penalty amount.

If you were uninsured for only part of the year, your prorated monthly penalty is 1/12th of the annual penalty. There was no penalty for a single short gap in coverage that lasted less than three months (so essentially it had to be one or two months; if it was a three-month gap, you'd pay three times 1/12 of the total penalty amount for the year)

For example, if you are single tax filer who was without insurance for five months in 2018 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 federal penalty was collected on federal tax returns for tax years 2014 through 2018. If you're in DC, Massachusetts, or New Jersey (and possibly California as of 2020), the penalty will be collected on state tax returns.

Rejection of Your Tax Return

Although the federal penalty no longer applies in 2019 or future years, the IRS stepped up enforcement of the penalty in 2018. For 2018 tax returns (which were due April 15, 2019 unless you got an extension), 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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Article Sources
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  1. US Department of Health and Human Services. Health Insurance Coverage And The Affordable Care Act, 2010–2016. Updated March 2016.

  2. Internal Revenue Service. While the IRS Continues to Do a Reasonable Job in Administering the Affordable Care Act (ACA), Taxpayers Still Encounter Difficulties Attempting to Comply With the Complex Provisions. Updated 2018.

  3. Internal Revenue Service. The fee for not having health insurance.

  4. Brookings Institution. State Individual Mandates. Updated October 2018.

  5. Commonwealth of Massachusetts. TIR 19-1: Individual Mandate Penalties for Tax Year 2019. Updated January 2019.

  6. Vermont General Assembly. H.696 (Act 182).

  7. US Healthcare. Health coverage exemptions: Forms & how to apply.

  8. Internal Revenue Service. Individual Shared Responsibility Provision – Reporting and Calculating the Payment. Updated December 2019.

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