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Beginning with their 2014 federal taxes, many consumers who can afford health insurance but decide not to buy it will owe penalties to the Internal Revenue Service when they file their taxes in early 2015. There will likely be repeated efforts to overturn this and other provisions of the Affordable Care Act, also referred to as Obamacare. But the Supreme Court decision to uphold the law's constitutionality this past summer has greatly increased the odds that the so-called individual mandate to have health insurance will be implemented over the next two years.

The nonpartisan Congressional Budget Office has estimated that roughly 4 million people will choose to pay a penalty each year instead of purchasing health insurance. This group is expected to be dominated by younger Americans without children who feel they are healthy enough to forgo insurance. Those penalties will be small in 2014 and 2015 before rising to their full levels in 2016.

Due to expected confusion in the early years of the program, more people may face penalties. But it's unclear what will happen if they don't pay them. The Affordable Care Act forbids the IRS from making aggressive efforts to collect the penalty from people who don't pay. The biggest stick the agency may have is withholding tax refunds from those who owe penalties.

Insurers are required to send out notices of health coverage that will, over time, become as routine as a taxpayer's W-2 statement of taxable wages. The 2014 notices are due to consumers and the IRS by Jan. 30, 2015. But this process may experience its own learning curve, and few people are predicting that a flawless reporting system will be in place right away.

The three major parts of the individual mandate rules are:

  • Understanding the nonfinancial grounds on which people are excluded from having to get insurance.
  • The income provisions affecting the need to be insured.
  • The penalties themselves.

Nonfinancial exclusions

The mandate is designed to apply to people who make enough money to buy private health insurance but choose not to be insured on their employer's plan, in the individual market or through the insurance exchanges that must be set up in each state under the law. The mandate does not apply to Americans age 65 and up who are covered by Medicare.

There is a long list of people who do not have health insurance but will not face a penalty on nonfinancial grounds. They include people who:

  • Are between jobs and without insurance for up to three months.
  • Have religious objections.
  • Are undocumented immigrants.
  • Are in jail.
  • Are members of an American Indian tribe.

Income provisions

The financial tests to avoid a penalty include having family income that is too low to require filing a federal tax return. Using 2010 rules, this would be less than $9,350 for an individual and $18,700 for a family.

Higher-earning households may also be exempted from the penalties if their out-of-pocket cost for private health insurance is more than 8% of their taxable income. This amount is for any additional cost after subtracting employer health care insurance contributions.

The amount also takes into account any health insurance subsidies available as tax credits through the state insurance exchanges being created by the act. A report from the CBO and the staff of the congressional Joint Committee on Taxation issued in March estimated that consumers who qualify for subsidies using state exchanges will receive an average benefit of $4,780 in 2014, $5,040 in 2015 and $5,210 in 2016. This benefit is mostly for the tax credits but also includes other support items, according to a Treasury Department spokeswoman.

Those credits are keyed to the nation's financial poverty guidelines. These are set each year by the government and adjusted annually based on changes in the Consumer Price Index. The exchanges will offer a sliding scale of insurance subsidies that extend to incomes as high as four times the poverty guidelines.

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