How to get out of paying the Obamacare tax

As taxpayers fill out returns leading up to Tax Day on Wednesday, they are for the first time encountering a few new lines of text asking whether they had insurance last year and if so, whether they used federal subsidies to buy it.

That first question — whether they’re covered — has caused more of an uproar than perhaps any other part of the Affordable Care Act. The “individual mandate” triggered a major Supreme Court case three years ago, in which justices were asked to strike it and potentially the entire law, but upheld it by defining the penalty for being uninsured as a tax that falls under Congress’ taxing authority.

The thought all along has been that without a financial penalty for remaining uninsured, the healthiest Americans won’t be motivated to buy coverage, leaving the insurance pools full of sicker, more costly customers.

Congress included in the healthcare law the uninsured fine to prod healthy people, especially those in their 20’s and 30’s, to buy coverage even if they think they don’t need it right now. A tax filer checks the “no” box on their return this year could be subject to a fine.

Yet the majority of the uninsured won’t end up having to pay up. This year at least, the penalty’s bark is a lot worse than its bite. Here’s why:

1. The IRS has only two ways to collect the tax.

There are only two ways the IRS can get the penalty from the uninsured: By taking it from their tax refunds or receiving it voluntarily. The agency isn’t allowed to use other tools normally at its disposal, like garnishing wages or issuing liens, to collect the penalty for being uninsured.

“It certainly reduces the size of the stick the IRS has to prod people into getting coverage,” said Bob Williams, a senior fellow with the Tax Policy Center.

So hypothetically, uninsured people could get out of paying a penalty forever, although it would be difficult. If they ensure that less than their total tax liability is withheld throughout the year, so that the government doesn’t owe them a refund, there would be no way for the IRS to collect it.

Jackie Perlman, a tax research analyst at H&R Block, said assisters have been asked about that possibility. “I’ve even seen that written places as a great strategy,” she said. “As far as I know, it’s theoretically possible, but it’s also extremely difficult to do.”

2. The tax is bigger than most people think, but still relatively small this year.

Most taxpayers think the uninsured penalty is $95 this year, tax assisters say, since that’s been the number most often reported in the media. That’s far below the cost of insurance premiums, so in the minds of some it makes sense to pay the penalty instead.

But that’s only part of the story. The uninsured must pay either $95 or 1 percent of income above the filing threshold, whichever is greater. That means someone earning $50,000 would pay about $400.

Some have wondered whether that’s enough to prompt more to buy coverage. But the key question is what taxpayers actually believe, tax experts say. Because many people think their fine would be $95, the penalty may be less effective as a motivating tool than if they realized the full truth of the matter.

Perlman said she’s seeing that happen a lot. “I can’t give you numbers on what people’s thinking is,” she said. “But I think some people were unpleasantly surprised.”

Williams said because of perceptions that the fee is a flat $95, he doesn’t think it will be very effective this year.

“I think the answer is it probably won’t get very many [enrollees] because that’s the number people are thinking,” he said. “And when you’re looking at premiums, no one is going to get away with less than $95 a year.”

In subsequent years, it will be much stronger. In 2016, it will increase to $325 or 2 percent of income above the filing threshold and after that it will equal $695 or 2.5 percent of income.

3. There are lots and lots of exemptions.

Do you have big medical debt? Was there a death in your family? Did you experience domestic violence?

These are some of the roughly 30 reasons an uninsured American could qualify for an exemption from the penalty. There are regular exemptions and hardship exemptions, some provided within the text of the law passed by Congress and others spelled out in rules by the Obama administration.

About 30 million Americans — roughly one-tenth of the population — remain uninsured, yet all but 7 million will qualify for exemptions from the penalty, according to projections last year by the Congressional Budget Office. Those estimates are for next year, but the exemptions are the same now.

The exemptions include circumstances that might have occurred during the filing year, making it hard for people to afford coverage. People can also cite religious beliefs as a reason for getting excused from the mandate.

And if they can show that the lowest-cost plan available to them would have cost more than 8 percent of their household income, they’re excused, too.