10/15/2013 01:47 pm ET | Updated Dec 15, 2013

Why You May Have to Pay a Tax Penalty if You Don't Have Health Insurance

Last week we talked about the new tax credit for 2014 that was created under the Affordable Care Act -- the health insurance Premium Tax Credit and the Advanced Premium Tax Credit. This week we are going to explain and give an overview of the Individual Shared Responsibility Payment otherwise known as the individual "penalty" part of health care reform.

All Americans must have minimum essential health coverage or be penalized by the IRS on their annual individual tax return, (the Form 1040) for each month of the year they are without insurance coverage. Individual insurance is required starting on January 1, 2014. All family members included on a taxpayer's return are considered part of the household for the penalty purpose and they must each have health insurance that meets the minimum essential coverage requirements all during the year.

In order to ensure that all taxpayers are complying with the new laws, a penalty will be assessed on qualified individuals, basically most all Americans, who do not have or purchase or otherwise maintain health insurance. So let's look at who is subject to the penalty and how it is computed.

Individuals covered under most government sponsored health programs including Medicare Part A, Medicaid, CHIP, Tricare and Veterans health care, as well as employer-provided health coverage, are considered to have minimum essential coverage and are not subject to the penalty. So if you have most any type of current insurance coverage by your employer or some other government program you need not worry. Alternatively, if you do not have health insurance coverage, you are likely at risk of a tax penalty in the future. Additional exemptions include:

• Members of a religious organization exempt from Social Security,
• Noncitizens including those not lawfully present in the U.S,
• Incarcerated individuals,
• Individuals not eligible for affordable coverage, and
• Individuals with household income below the annual tax return filing requirements.

In addition, taxpayers who have a short coverage gap of less than three months may be exempt from the penalty. So what is the penalty? Starting in 2014 will range from a minimum of $95 to 1 percent of the household income. By 2016, penalty amounts will range from a minimum of $695 to 2.5 percent of the household income. The penalty is treated like a tax when you file your tax return and could lower your refund or increase any amount due.

The net bottom line is that if you do not have health insure during 2014, even for a part of the year, you may owe an individual shared responsibility payment or what will otherwise be felt as a penalty.