If you have a fairly high income, the maximum penalty is a lot higher for 2017.
The IRS reported that for tax filers subject to the penalty in 2014, the average penalty amount was around $210. That increased substantially for 2015, when the average penalty was around $470. Final data for 2016 won’t be available until early 2018, but the IRS published preliminary data showing penalty amounts on 2016 tax returns filed by March 2, 2017. At that point, 1.8 million returns had been filed that included a penalty, and the total penalty amount was $1.2 billion — an average of about $667 per filer who owed a penalty.
Although the average penalties are in the hundreds of dollars, the ACA’s individual mandate penalty is a progressive tax: if a family earning $500,000 decided not to join the rest of us in the insurance pool, they could owe a penalty of more than $16,000 for 2017. But to be clear, the vast majority of very high-income families do have health insurance.
Today, the median net family income in the United States is roughly $56,500 (half of U.S. families earn less; half earn more.) For 2017, the penalty for a middle-income family of four earning $60,000 would be $2,085 (the flat rate penalty would be used, because it’s larger than the percentage of income penalty; see details below, under “how the penalty works”). This is far less than the penalty a more affluent family would pay based on a percentage of their income.
The penalty can never exceed the national average cost for a bronze plan, though. The penalty caps are readjusted annually to reflect changes in the average cost of a bronze plan:
- The IRS announced in Revenue Procedure 2015-15 that the maximum 2015 penalty was $2,484 for a single individual and $12,420 for a family of five or more (both slightly higher than the maximum penalty amounts for 2014).
- For 2016, Revenue Procedure 2016-43 increased the maximum penalty to $2,676 for a single individual, and $13,380 for a family of five or more, if they were uninsured in 2016.
- For 2017, Revenue Procedure 2017-48 increased the maximum penalty to $3,264 for a single individual, and $16,320 for a family of five or more. The significant rate increases that we saw for 2017 (roughly 25 percent) mean that the average bronze plan is quite a bit more expensive in 2017 than it was in 2016. And that means that the maximum penalty is also quite a bit higher.
The maximum penalties rarely apply to apply to very many people, since most wealthy households are already insured.
How the penalty works
Your tax is the greater of either 1) a flat-dollar amount based on the number of uninsured people in your household; or 2) a percentage of your income (up to the national average cost of a Bronze plan , as determined by the IRS and adjusted annually to reflect changes in premiums).
This means wealthier households will wind up using the second formula, and may be impacted by the upper cap on the penalty. For example: for 2017, an individual earning less than $37,000 would pay just $695 (flat-dollar calculation) while an individual earning $200,000 would pay a penalty equal to the national average cost of a bronze plan ($3,264 for 2017). This is because 2.5% of his income above the tax filing threshold would work out to about $4,740, which is higher than the national average cost of a bronze plan.
1) Flat-dollar amount
In 2014, the flat-dollar penalty was $95 per uncovered adult (it climbed to $325 in 2015, and $695 in 2016) plus half that amount for each uninsured child under age 18. Your total household penalty is capped at three times the adult rate, no matter how many children you have. In 2014, that was $285 ($975 in 2015, and $2085 in 2016). Starting in 2017, the flat-rate penalty is subject to annual adjustment for inflation. But for 2017, the IRS has confirmed that there’s no inflation adjustment, so the flat-rate penalty continued to be $695 per adult in 2017, with a maximum of $2,085 per family
2) Percentage of income
In 2014, the penalty was 1 percent (it rose to 2 percent in 2015, 2.5 percent in 2016 and beyond). The penalty is capped at the average cost of a Bronze plan, which for 2017 is $3,264 for an individual and $16,320 for a family of five or more; this cap adjusts annually to keep up with the average cost of Bronze plans. Wealthy households will be happy to know that they will pay a penalty only on that portion of their adjusted gross income “above and beyond their filing threshold,” explains the Center on Budget Policy and Priorities‘ Judy Solomon.
For most people, this will simply be adjusted gross income from your tax return. But if you have non-taxable Social Security benefits, tax-exempt interest, or foreign earned income and housing expenses for Americans living abroad, you’ll need to add those amount to your AGI from your 1040 and put the total amount into the penalty calculator. Be sure to include income from any dependents who are required to file a tax return.