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Planning to Ignore the Obamacare Mandate? Here’s What You Need to Know

The following is a guest post by Carter Smith from PrivateQuote.com.

tax on backTo paraphrase Shakespeare, a tax by any other name would still smell as vile. But the Obamacare tax, otherwise known as the “individual mandate,” may be an exception. While I am not suggesting that you avoid the tax, it is clear that many people intend to do just that. A recent Gallup poll found that 34% of Americans intend to thumb their noses come tax time instead of holding them.

This article will provide facts (not rumors) about what the mandate is, how much it can cost you, how the IRS may or may not enforce it, and how to protect yourself should you choose not to comply.

How the Mandate Works and What It Could Cost You

Make no mistake, the individual mandate is a tax disguised as a penalty. The Supreme Court said as much when it ruled the mandate constitutional. It is designed to force reluctant taxpayers to purchase health insurance through the problem-plagued exchanges if they are not covered by their employers.

Starting in tax year 2014, individuals and families who fail to purchase health insurance will face a tax of 1% of adjusted income. Basically, your penalty is calculated by taking your income minus $10,000 for an individual ($20,000 per family) and multiplying what remains by 1%. That tax will increase to 2.5% by 2016.

The President’s recent proposal to allow insurance companies to continue providing “substandard plans” into 2014 would do nothing to delay the mandate or its associated penalties. You still must be insured under the mandate, although it appears the law has restricted the ability of the IRS to enforce penalties against those who don’t comply.

Here’s How the IRS Can and Cannot Enforce the Mandate

Historically, the IRS has been granted immense power to enforce federal tax policy and pry open your wallet. The tools at their disposal include wage garnishments, liens, asset seizures and even imprisonment. Scary stuff. In the case of Obamacare, some have speculated that the taxman will simply take the money out of your bank account if you don’t comply with the individual mandate. Fortunately, that looks unlikely.

Section 1501 of the Affordable Care Act (a.k.a., “Obamacare”) specifically states,

in the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.”

A report by the congressional Joint Committee on Taxation which drafts and analyzes legislation notes, “the use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty.” In case of non-compliance, interest does not even accrue on the unpaid amount. Those who drafted the law intended to preclude the IRS from using the more aggressive tactics that are usually at its disposal.

So how can the IRS collect the tax associated with the individual mandate?  By keeping all or a portion of your income tax refund up to the amount of the penalty, that’s how.

Don’t Let the Feds Use Your Money for Free

Unfortunately, more than 80% of taxpayers receive a refund when they file their Federal tax return. The average taxpayer is having too many tax dollars deducted from their paychecks throughout the year and giving it to the federal government in the form of an interest free loan. In this case, it also means the IRS will be able to confiscate the Obamacare tax from you by keeping all or a part of your income tax refund.  But if they don’t owe you a refund, they can’t collect the tax using their more familiar strong-arm tactics.

Regardless of your intention to pay or not pay the Obamacare tax, it doesn’t make sense to give the Feds an interest free loan year after year. If you are an employee, it is fairly simple to get an accurate estimate of your tax liability and adjust your W-4 withholding exemptions to avoid either a big refund or payment come tax time. And if you plan to skirt the Obamacare tax, it’s essential that you do so.

To summarize, if you’re really intent on avoiding the tax imposed by the individual mandate, carefully manage your tax payments throughout the year so you are not due a refund. You should come out smelling like a rose.

Editor’s Questions: How has Obamacare changed what you are doing for health insurance? What are your thoughts on those who choose to ignore the mandate? Is that an ethical issue?

Author Bio: Carter Smith is an independent business development consultant, with a special emphasis on helping Christian companies and organizations grow to their full potential. Carter is currently helping PrivateQuote.com revolutionize the way people compare and buy term life insurance from the best life insurance companies. Carter can be reached at this email address.

Image at FreeDigitalPhotos.net

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  1. Done by Forty says

    For what it’s worth, our insurance premiums have gone down in 2014 (HSA plan, high deductible). And my wife’s coverage through school has gotten MUCH better, as we were able to have an IUD for no cost. So far, the changes have been positive. As for the mandate, it won’t impact us as we would not have chosen to gone without healthcare at this stage in our lives.

    • We extended our HSA for another year and it only went up slightly. However, I saw the increase for the policy if we had joined one of the exchanges and it was a dramatic increase – over 60%. I will not be without health care coverage either with four kids still in the house, but make no mistake, this mandate will eventually impact us all greatly in some form or fashion.

      • Done by Forty says

        The mandate itself should have a positive impact, especially for those who were already paying for insurance. Forcing the previously uninsured to now pay into the system (rather than, say, going without coverage, using the ER for routine care and/or never paying bills, claiming bankruptcy due to medical bills, etc.) should be a good thing for us who have always had coverage. Of course, there’s a lot more to the ACA than the mandate.

    • I’m really happy your coverage has improved. I hope there will be many more people like you who find some benefit in the new law.

  2. I have insurance through my union through June, then I’ll be signing up for the exchanges. Personally, I’m thrilled about the new healthcare law. I don’t understand the logic of paying NOT to have insurance.

    • It doesn’t seem logical Stefanie. I would guess people’s reasoning probably centers around their desire to not be under the government’s thumb. In other words, they don’t want the government telling them what to do on this issue. So it’s a freedom thing in their mind.

      • To many of the people in the so-called “young and invincible” demographic, it makes perfect sense. If you believe that there’s no way you’re going to die in the next 40 years, paying a small fine would appear a wiser course than paying for a much more expensive health insurance plan.

    • Thanks for your comment. I think the logic for many people simply comes down to hard choices with the family budget. Younger people could reasonably conclude that they want to invest in a house they are certain to live in as opposed to insurance for a catastrophic event that is unlikely. It all depends on your own personal risk/reward tradeoff and your priorities. At this point, it appears that millions of people will continue to choose to spend thousands of dollars each year on something other than health insurance. It might not be my choice, but in their minds it is the logical choice based on their circumstances.

  3. Thanks Carter. Articles like this become necessary when legislation is passed by people who haven’t even read the bill.

    • “…passed by people who haven’t even read the bill.” That’s a very true but sad reality Richard. You know if the legislators haven’t read it the general public has no clue what’s in the bill. For instance, I didn’t know the IRS was going to be limited in how they could collect this tax.

  4. Personally, as one who has been self-employed and an owner of small businesses his whole life, I feel it’s best to always try to stay on the good side of the IRS. But, that’s just me.

  5. Holly Johnson says

    The policy that we have through the individual market was extended for another year and doesn’t expire until Dec. 2014. After that, I don’t know what we’ll do. The cheapest new plans available are prohibitively expensive, and that’s even with a 10K deductible or more. I am going to revisit the issue later this year when we find out how and if the rules have changed.

    • We’re in the same boat as you, Holly — our current plan is still a 2013 plan that expires late in 2014. I just got a notice that my OBGYN that delivered all four of our kids won’t accept the new exchange plans. I am hoping that the rules will be changing as people start to work out the details.

      • Holly, there are a lot of people experiencing the same thing. The insurance in many cases amounts to catastrophic coverage. That certainly has its place but at what cost? At this point, only 2 million people have signed up while 6 million have lost coverage. I don’t think that’s just a matter of website troubles. It’s an economic decision families are making about how best to spend their money. Many of them aren’t seeing value in the policies being offered so they’re sitting on the sidelines. And a lot of those aren’t too happy about paying a tax because they don’t want to buy what they consider to be a bad product.

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