(CNSNews.com) – In new, final regulations issued Wednesday, the Internal Revenue Service (IRS) said that parents must pay a federal fine under Obamacare if their children or dependent spouses are uninsured for any part of the year.
The regulations clarify provisions of Obamacare that seem to say that a parent will be held liable for Obamacare’s individual mandate penalty if they don’t have insurance coverage for their children.
In its final regulations, the IRS states that parents will be made to pay the penalty (called a "shared responsibility payment") if they can claim an uninsured child or spouse as a dependent, regardless of whether they actually claim them or not.
“The proposed regulations clarify that a taxpayer is liable for the shared responsibility payment imposed with respect to any individual for a month in a taxable year for which the taxpayer may claim a personal exemption deduction for the individual (that is, the dependent) for that taxable year,” the regulations state.
“Whether the taxpayer actually claims the individual as a dependent for the taxable year does not affect the taxpayer's liability for the shared responsibility payment for the individual.”
In other words, if a child goes without government-defined health insurance coverage for any month of the year, their parent must pay a fine to the government, regardless of whether they claim the child as a dependent or not.
The only thing that matters to the IRS is whether the parent could claim the uninsured child as a dependent.
The same rule applies to an uninsured spouse if the couple files a single tax return. If they file a joint return, both parents are liable for the fine.
The IRS calls this arrangement a “shared responsibility family,” and it includes adopted children.
Parents who give their children up for adoption or place them in foster care are not liable for the penalty once they give up their children. However, they are still liable for the penalty for the months before they gave up their children.
The regulations also state that even if the parent is exempt from the Obamacare penalty, they can still be fined for not having insurance for their children. Under the law, people who are on Medicaid or who have income below the federal poverty line are exempt from the individual mandate, for example.
Broadly, Obamacare says that the penalty for not having insurance is the lesser of the cheapest government-approved health insurance plan premium or the alternative, calculated penalty. The IRS regulations lay out how families can calculate this alternative penalty amount.
Uninsured adult family members use the full per-person cost of $695 per person when calculating their penalty, while uninsured children are penalized half of the adult cost – $347.50 per child. The amount of penalty parents may face will change every year after 2016, the IRS said, and parents will face a phased-in penalty between 2014 and 2016.
For 2014, parents could face a penalty of either $47.50 per child – under 18 – up to $285 total.
For 2015, the per-child penalty is $162.50 per child up to $975 total.
For 2016, the per-child penalty is $347.50 per child up to $2,085 total.
The per-person penalty is capped at $2,085 for 2016, but that cap will rise with inflation every year thereafter.
While the per-person penalty is capped each year, families can still owe more if their income is high enough because the law states that families must pay the greater of either the per-person penalty of 2.5 percent of their taxable income.
In the regulations, the IRS gives an example of just such a family. This family has five members – two parents and three children – and has a pre-tax income of $120,000. The IRS assumes that the minimum insurance premium for this family will be $20,000 per year in 2016, meaning that they will either pay the per-person cap of $2,085 or 2.5 percent of their taxable income.
In its example, the IRS assumes the family’s taxable income will be $96,000 -- $120,000 minus the filing threshold of $24,000 – meaning that their tax penalty will be $2,400 under Obamacare.
Because the $2,400 tax penalty is greater than the per-person cap of $2,085, the IRS says that this example family must pay $2,400 for not being able to afford the $20,000 yearly minimum insurance premium.
For families, this means that they will be faced with paying either a per-person penalty for not having government-approved health insurance or a penalty based on their income, whichever is higher.
The way the government’s formula works is that smaller-wealthier families will likely pay based on income – because their tax-based penalty will be higher than their per-person penalty, while larger, poorer families will likely pay the per-person penalty, because 2.5 percent of their taxable income will be lower than the $2,085 per-person cap in 2016.
This dichotomy means that there will effectively be one standard for wealthier families – the tax-based penalty – and another for poorer families – the per-person penalty.
For instance, a similar family of five making only $80,000 per year in 2016 will end up paying the per-person maximum of $2,085, because their tax-based penalty would only be $1,400, assuming the same filing threshold of $24,000 and the $20,000 insurance premium the IRS gives in its example.