An obamacare question

[cientax]

In determining the penalty for not signing up, the minimum is $95 or 1% of income. Which part of the income is the penalty figured on for a self employed person? Is it Gross income before expenses, or is it net income after expenses, or is it TAXABLE INCOME after standard deduction and personal exemptions? Can anyone please provide the correct information. This is a question by one of my clients.

I have not read the act as of yet and don't know the answer. Thanks.

[Mr. Pencil]

Is it Gross income before expenses, or is it net income after expenses, or is it TAXABLE INCOME after standard deduction and personal exemptions?

Do you really think the calculation will be that simple? I suggest you defer the answer until you have taken an update class and had a chance to study the IRS form and instructions, which haven't been issued yet because it doesn't apply until 2015 and part of the calculation involves the average price of bronze plans, whatever that turns out to be.

Yes, like so many recent tax laws, it makes tax planning mighty hard. Is there some reason the client doesn't want insurance? Maybe he enjoys taking risks, so if he will risk his health he surely won't mind risking his tax. Well, never mind.

If you must give an incomplete answer, the calculation will use a modified AGI like taxable Social Security, that is, AGI plus tax exempt interest and the foreign earned income exclusion. For self-employment income, I suppose that means whatever ends up on Line 12 minus 1/2 SE tax and any deductions for health insurance or an IRA. It will also depend on the number of family members and the number of months as well. You only count the excess over the filing threshhold, which I think just means standard deduction plus personal exemptions unless kiddie tax is involved.

[Kimberly K]

AGI

[Guest Taxed]

It is not based on just AGI. It is a bit complicated and we will get instructions from the IRS in 2014.

The basic penalty is $95 in 2014

if you’re unmarried with no dependents and your income is less than $19,500.

If your income is higher: 1 percent of the amount by which your income exceeds the sum of a single person’s personal exemption and standard deduction.

Income equals adjusted gross income plus any tax-exempt interest and excluded income earned abroad.

If you’re married or have kids, you’ll owe a minimum of $95 per person for yourself, your spouse, and each dependent over age 17 plus half that amount for each child under 18. If your income is higher you also have to go through that 1% of income calculation above adding any income your dependents earn. So if your 15 yr old kid earns $7000 at McDonalds, add that.

There’s a cap. Your total penalty can’t exceed the national average premium for a bronze-level health policy for your family’s size. That is still unknown right now and we will know by end of next year.

If my client asked me today. I would use this language from the healthcare.gov:

The penalty in 2014 and beyond

The penalty in 2014 is calculated one of 2 ways. You’ll pay whichever of these amounts is higher:

• 1% of your yearly household income. The maximum penalty is the national average yearly premium for a bronze plan.

• $95 per person for the year ($47.50 per child under 18). The maximum penalty per family using this method is $285.

The fee increases every year. In 2015 it’s 2% of income or $325 per person. In 2016 and later years it’s 2.5% of income or $695 per person. After that it is adjusted for inflation.

If you’re uninsured for just part of the year, 1/12 of the yearly penalty applies to each month you’re uninsured. If you’re uninsured for less than 3 months, you don’t have a make a payment.

I am also sure all the tax prep software companies will have a calculator built in the program for that purpose.

[Kimberly K]

I know that there are many different variables to the calculation, and I have read the same specifics and taken cpe credits on the ACA. He asked a basic question, so I gave a basic answer, it is up to each individual Tax Pro to get educated. But I am not going to get my panties in an uproar over something that is going to take a bit to smooth the edges of the ACA.

[Jack from Ohio]

Household AGI determines eligibility for subsidies. Penalties apply to each member of the household, even if not claimed as a dependent. Penalty is calculated on AGI.

[Lee B]

Be aware the the definition of AGI for calculating the credit and the AGI for the calculation of the penalty are not exactly the same.

[Guest Taxed]

Failure to Pay Penalty

Taxpayers who are required to pay a penalty but fail to do so will receive a notice from Internal

Revenue Service (IRS) stating that they owe the penalty. If they still do not pay the penalty, the

IRS can attempt to collect the funds by reducing the amount of their tax refund in the future.

However, individuals who fail to pay the penalty will not be subject to any criminal prosecution

or penalty for such failure. The Secretary of Treasury cannot file notice of lien or file a levy on

any property for a taxpayer who does not pay the penalty.

[easytax]

It is not based on just AGI. It is a bit complicated and we will get instructions from the IRS in 2014.

The basic penalty is $95 in 2014

if you’re unmarried with no dependents and your income is less than $19,500.

If your income is higher: 1 percent of the amount by which your income exceeds the sum of a single person’s personal exemption and standard deduction.

Income equals adjusted gross income plus any tax-exempt interest and excluded income earned abroad.

If you’re married or have kids, you’ll owe a minimum of $95 per person for yourself, your spouse, and each dependent over age 17 plus half that amount for each child under 18. If your income is higher you also have to go through that 1% of income calculation above adding any income your dependents earn. So if your 15 yr old kid earns $7000 at McDonalds, add that.

There’s a cap. Your total penalty can’t exceed the national average premium for a bronze-level health policy for your family’s size. That is still unknown right now and we will know by end of next year.

If my client asked me today. I would use this language from the healthcare.gov:

The penalty in 2014 and beyond

The penalty in 2014 is calculated one of 2 ways. You’ll pay whichever of these amounts is higher:

• 1% of your yearly household income. The maximum penalty is the national average yearly premium for a bronze plan.

• $95 per person for the year ($47.50 per child under 18). The maximum penalty per family using this method is $285.

The fee increases every year. In 2015 it’s 2% of income or $325 per person. In 2016 and later years it’s 2.5% of income or $695 per person. After that it is adjusted for inflation.

If you’re uninsured for just part of the year, 1/12 of the yearly penalty applies to each month you’re uninsured. If you’re uninsured for less than 3 months, you don’t have a make a payment.

I am also sure all the tax prep software companies will have a calculator built in the program for that purpose.

Household AGI determines eligibility for subsidies. Penalties apply to each member of the household, even if not claimed as a dependent. Penalty is calculated on AGI.

Alright, I'm dense -- please bare with me (no photos - please ). Based on the above -- especially this part

"1% of your yearly household income. The maximum penalty is the national average yearly premium for a bronze plan.

• $95 per person for the year ($47.50 per child under 18). The maximum penalty per family using this method is $285."

"Penalties apply to each member of the household,"

Understood to this point HOWEVER -- since household income can be looked at as belonging to both family partners and/or even maybe kids --- would not this entire 'household income" be used for each family members penalties? I know this is simply stating the idea/question, etc. but I'd like to fully understand this.

Another reason is --- will not the families/people NEED to know this so they can figure out what if any subsidies' or penalties there might be -- and they will ask us, the practitioner, so I'd like an understandable answer to give them on both --- penalties and HOW MUCH they might be able to ask for/get in early/prepaid subsidies. It's kind of like a W-4 for withholding --- I'd like to be able to answer the how-to do the form question for them --- it's a tax thing and NOT a legal or insurance question (as least not alone).

Thanks again --- Happy New Year to all!

[cientax]

I didn't ask for any one to calculate the penalty, I only asked if the penalty will be based on gross income, taxable income or net income for a self employed person. I have heard and read different from various sources where some say gross income, some say taxable income, and some say household income. If this is going to cause such an uproar, especially with Mr. Pencil who is a liberal, then forget that I ever asked the question. I'm outta here.

[Guest Taxed]

There will be a bunch of regulations issued before 2015 that will clarify things. I am not going to be explaining to my clients right now what his/her penalty might be in 2015! I will give them the general explanation that is in healthcare.gov and ask them to contact me at the end of 2014.

Remember if you get insurance as required, you should NOT have to worry about penalties. Those are the type of people I like to help!