Why Do I Have an Insurance Penalty in 2021?

If you are a Californian with no health insurance in 2020, you may face a tax penalty in 2021. Though in 2019 the Trump administration rescinded the tax penalty established by the Affordable Care Act, you may still need to pay a tax penalty in 2021 if you live in California and do not have health insurance. 

Your options are either to not carry health insurance and pay a penalty at tax time or to enroll in a qualified insurance plan and avoid paying the penalty, though some exceptions may apply depending on your circumstances.

What Is an Insurance Penalty?

In 2014, a mandate was implemented in the United States for individuals and employers to have health insurance as part of Obamacare. Most individuals who were legal residents or U.S. citizens were required to purchase qualifying health insurance or else they would need to pay a tax penalty. While this tax penalty has been rescinded at the federal level, some states are now implementing their own penalties for individuals without health insurance.

Many individuals already have qualified health insurance coverage through an employer or a public program, such as Medi-Cal or Medicare. Those without health insurance coverage from a public program or their employer will need to purchase their own insurance from a private insurance company or a federal- or state-run health benefits exchange. 

Tax credits or subsidies may be available through health benefit exchanges to lower-income families. As a California resident, you should carry insurance throughout the year with no gaps in coverage of 90 days or more. Otherwise, you may face a tax penalty when you file your tax return.

Why Do I Have an Insurance Penalty in 2021? 

Why might you have an insurance penalty in 2021 when you file your taxes? January 2021 will be the first time since the Trump administration began that individuals will be penalized in California for not having insurance. When you get your W2, it will include your W2 insurance penalty if you did not have insurance in 2020. 

The reason for this is that the Trump administration made it easy for individuals to tick something off in the tax filing process that said they had insurance the previous year. This will no longer be the case. Some states have also put in place coverage mandates. In 2020, California became one of those states, which is why you will be penalized when you file your taxes in 2021 if you do not have health insurance this year. 

There may be some exemptions in California, including households with an income level that falls under the threshold for state tax filing. States are likely implementing these penalties to encourage residents to carry health coverage. 

California utilizes two different ways to assess insurance penalties. You may either be charged a flat amount of $695 for each adult or $347.50 for each child without insurance, or you may be charged 2.5% of your gross income that is in excess of the filing threshold in the state. The chosen method for the penalty will be based on whichever amount is higher. 

What Can I Do to Avoid an Insurance Penalty?

To avoid a penalty at tax time for not having health insurance, you must either enroll in a qualified health plan or have a valid exemption.

1. Enroll in a Qualified Health Plan

You can buy something like short-term health care in 2020 or sign up for insurance if you have a qualifying life event. If you do so, the penalty will be reduced because it is calculated on a month-to-month basis. For example, the penalty is larger if you did not have insurance for 12 months versus eight months. 

If you miss the Open Enrollment period, you may be able to enroll during the special enrollment period if you have a Qualifying Life Event, such as losing health insurance, having a baby or moving to California. 

In preparation for the 2021 tax season, collect the documents that demonstrate you had appropriate health insurance coverage. Check the mail for Forms 1095-A, 1095-B and 1095-C that show whether you and the members of your household had health coverage during the year. To receive this paperwork, you may need to contact your human resources department or health insurance provider. 

If you are an employee with employer-sponsored health insurance coverage, you will receive a statement from your employer that indicates you were covered for part of the year or for the entire year.

2. Have a Valid Exemption

There are a few circumstances in which you may be exempt from paying a tax penalty. The following are some common exemptions:

  • Coverage is considered to be unaffordable: Coverage through your employer or through a health benefit exchange may be considered unaffordable if it costs more than 8.13% of your total household income. 
  • You had a short coverage gap: A short coverage gap means you are uninsured for less than three consecutive months during the year. 
  • Your income is lower than the state threshold for tax filing: If your income is lower than the state tax filing requirement, you may not be required to file taxes or pay a penalty for not having health insurance. 
  • You were incarcerated: You may be exempt from the tax penalty if you were incarcerated. 
  • You are a member of an Indian Tribe: You may be exempt from the tax penalty if you are a member of an Indian Tribe that is federally recognized. 
  • You experienced general hardship: You could be exempt if you experienced circumstances that did not allow you to obtain qualified insurance, such as eviction, homelessness, foreclosure, unpaid medical bills, domestic violence or the death of a close family member. 
  • You are a member of a certain religious sect: You may be exempt from the tax penalty if you are a member of a certain religious sect or a healthcare sharing ministry.

Speak with a tax professional about the details of valid exemptions to determine whether an exemption may apply to your situation. 

Sign up for Insurance With Health for California

Health insurance is one of the most important purchases you will make. In California, you may need to purchase Individual Health Insurance in the following circumstances:

  • The group plan you are enrolled in does not cover your dependents or spouse.
  • You have a health plan, but your needs for benefits have changed. 
  • Your health plan premiums are too high. 
  • Your employer does not offer a group health insurance plan.
  • You are self-employed. 

To avoid the California insurance penalty, you should obtain health insurance. Get a free quote for insurance with Health for California today.