Taxpayers will report their health coverage exemptions on Form 8965. Individuals seeking a hardship exemption must apply through the exchange. If the exchange approves the exemption, the applicant will be given a code number that he or she will enter on Part I of the form to substantiate the claimed exemption. Most other exemptions can be claimed on Form 8965 when filing the return.
Folks will use a worksheet in the instructions to Form 8965 to figure the tax that they owe for each month they and their dependents are uninsured and not eligible for an exemption. They will then transfer the amount to a separate line on the 1040. We’ve seen a draft of the worksheet. It is very complex and will be confusing to fill out.
The tax for being uninsured is typically the higher of two amounts: The basic penalty or an income-based levy. The basic penalty for 2014 is $95 a person ($47.50 for each family member under age 18), with a ceiling of $285. The income-based penalty is 1% of the excess of the taxpayer’s household income over the minimum level of income needed to trigger the filing of an income tax return. The tax is lowered proportionally for any months the taxpayer had health insurance. But in no case can the tax exceed the cost of a bronze-level exchange plan for the taxpayer and family members, also adjusted for months with health coverage. For 2014, that monthly cost is $204 per person and $1,020 for a family of five.
IRS has limited remedies to collect this tax. It cannot use liens and levies, so it can only offset tax refunds. Nor can it charge interest on the unpaid balance. For 2015, the tax will be significantly higher. The basic penalty will soar to $325 a person ($162.50 for each family member under 18), with a ceiling of $975. The income-based penalty will be 2% of household income over the filing threshold. In 2016, the basic penalty rises to $695, and the income-based levy is a tad higher.