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Got $172? That's the typical Obamacare penalty

Rick Newman
Columnist

One of the last big unanswered questions about the Affordable Care Act is how taxpayers will react when they have to pay penalty fees for the first time this tax filing season. We’re beginning to find out.

Obamacare, as the ACA is known, requires most Americans to have health insurance or fork over a “shared responsibility payment” — aka, a penalty fee -- which is assessed each year when people file their tax returns. The fee for 2014 is $95 or 1% of your income, whichever is more. But a long list of exemptions provides an out for many uninsured people, and this year is the first test of whether the penalties and exemptions will generate outrage or generally seem fair.

Darrek Smith of Portland, Ore., priced out his health insurance last year, and decided the $180 monthly premium for a modest “bronze” plan was more than he could afford. On paper, his income of $40,000 or so seems like more than enough to cover the cost. But he’s divorced and pays child support in addition to his own housing costs, which leaves virtually no spare cash. So unless the 31-year-old brewmaster can convince the IRS to grant him an exemption, he’ll get hit with a penalty of about $400 when he files his taxes. “There’s a big gaping hole in that they judge people based solely on what it seems like they can afford, and not on circumstances,” Smith says.

Penalty fees will sting less for many others who have to pay them. Data gathered by H&R Block, the tax-prep service, shows that taxpayers who went without insurance last year are paying penalty fees averaging $172, based on tax returns prepared through mid-February. But that could go up as the April 15 filing deadline nears.

The Obama administration expects as many as 6 million families to owe a penalty for not having health insurance in 2014. And the Congressional Budget Office estimates penalty fees will generate about $2 billion in government revenue this year. That math suggests the average penalty payment could end up being as high as $333.

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Some people who owe a penalty still don’t know the bill is coming. One recent survey found that 44% of uninsured Americans know little or nothing about the rules requiring them to pay. Others may have underestimated the payment, because they assumed the $95 minimum applied to everybody and weren’t aware of the 1% alternative, which adds up to more for anyone who earns more than $9,500. Others may escape the penalty because their income was too low, but they still have to fill out a tax form to find out if that's the case.

Confusion is understandable. Consumers are expected to educate themselves about the new rules, which are complicated to start with. And public discourse on the subject has been dominated by fulminating politicians, which often makes tuning out the whole drama seem like the only sane thing to do.

For all the attention the ACA gets, roughly 75% of tax filers had health insurance in 2014 and won't have to do anything different on their returns this year except check a box indicating they were covered. And a lot of people who didn’t have insurance in 2014 will escape penalty fees by claiming an exemption. The ACA includes more than two dozen exemptions for people who can’t afford health insurance (even with government subsidies), claim religious objections or suffer hardships such as bankruptcy or eviction. One provision lets people off the hook if they experienced “a hardship that kept you from getting health insurance,” which some analysts think is a catch-all exemption the Obama administration can invoke as a way to clear uninsured consumers instead of coming down hard on folks who violate a law that’s already unpopular.

Who's paying a penalty?

The government expects as many as 30 million tax filers who didn't have insurance in 2014 to receive exemptions freeing them from paying a penalty fee. That’s five times the number who are likely to pay a penalty, which could provoke claims of unfairness once tax season is over and it’s clearer who paid and who didn’t.

About 80% of people who file taxes get a refund, and those who owe a penalty will simply have the correct amount deducted from the refund they’re due. Filers who don’t get a refund, but still owe the penalty, will be expected to cut a check to Uncle Sam. The IRS hasn’t spelled out what it will do if they don’t pay up. The government has hinted it won’t aggressively pursue Obamacare deadbeats, but that could lead others who pay the penalty as required feeling cheated.

A few other loose ends with the ACA still need to be tied up. Some people who received government subsidies that helped cover the cost of coverage in 2014 are discovering they need to pay some of that money back, because they earned more last year than they estimated when applying for a subsidy. So they got more of a benefit than they ultimately qualified for. That process of “reconciliation” seems likely to be as unpopular as the penalty fees.

The other big hurdle for Obamacare this year is a Supreme Court case, King v. Burwell, that could make federal subsidies illegal in 34 states that don’t have their own healthcare exchange and rely on the federal marketplace. If the justices side with the plaintiffs, it could shatter the economic underpinnings of the ACA and threaten its existence. That, however, doesn't count as one of the exemptions for people owing the 2014 penalty fee. So if you owe, try another.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.