What you need to know about penalties

All the press is about the recent decision for a one year delay to the employer mandate (companies with over 50 employees) to provide health insurance to their employees who work full time. However, there has been no change to the individual mandate, requiring individuals to buy coverage if they are not covered through their employer, beginning January 1, 2014. 

If you do not buy insurance, you will have to pay a penalty of $95 per person or 1% of household income, whichever is greater. These penalties will rise in the following years.  Household income would include any income from an adult but also income from kids. If a couple of kids are earning income from summer jobs, this must be included in the household income calculation.  You are exempt from the penalty if you have to pay more than 8% of your household income for health insurance and this can be calculated each month. You are also allowed to present a hardship case to the IRS and ask for an exemption.

The household income is based on your modified adjusted gross income (MAGI).  This is a number which is the Adjusted Gross Income (AGI) which includes various deductions to reduce taxable income (but before standard or itemized deductions) with these items added back in:

• Any deduction you claimed for a regular contribution to a traditional IRA.
• Any deduction you claim for student loan interest or qualified tuition and related expenses.
• Any income you excluded because of the foreign earned income exclusion.
• Any exclusion or deduction you claimed for foreign housing.
• Any interest income from series EE bonds that you were able to exclude because you paid qualified higher education expenses.
• Any employer-paid adoption expense you excluded.
• Any amount claimed as domestic production activities deduction