With ongoing political turmoil surrounding Obamacare and regular updates to the implementation of the Affordable Care Act, understanding the health insurance law is not getting any easier. For millions of uninsured Americans, health reform presents an important decision: purchase health insurance or face a tax penalty. If you’re one of the millions facing this predicament, use this guide to further weigh your options.  

Understanding the Individual Mandate

One of Obamacare’s main goals is to decrease the number of uninsured individuals in the U.S.—a figure that currently stands at 48 million, or just over 15 percent of the population. Under the law’s individual mandate, just about everyone is required to have health insurance starting January 1, 2014.

There are, however, exceptions to this rule. The individual mandate doesn’t apply to incarcerated individuals, undocumented immigrants, members of American Indian tribes, or individuals whose religious group opposes healthcare. Additionally, you are not required to obtain coverage if buying health insurance poses a severe economic hardship, a situation that arises when the cost of premiums amount to greater than eight percent of your income.

If you do not fall into one of these categories, you must obtain a qualifying health plan to avoid the penalty. Qualifying plans provide “essential health benefits,” which includes services such as outpatient care, maternity and newborn care, and laboratory services, among many others.

Most employer and government-sponsored health plans currently offer at least the minimum required coverage. Thus, you need not do anything if you have an existing, qualifying plan. But if you are currently uninsured or you plan has recently been cancelled, you must either purchase a qualifying individual policy by the deadline of March 31, or face a penalty.

The Price of No Insurance

All Americans have the option to waive coverage by paying a yearly penalty. The Congressional Budget Office estimates that 6 million people will pay over $7 billion in penalties to the federal government in 2016. Calculating how much the penalty will cost you is simple, but keep in mind that paying the penalty won’t necessarily be the only financial burden of going without insurance. In 2014, the penalty for an individual will amount to the greater of $95 or 1 percent of your annual income.

Average out-of-pocket healthcare spending per capita is nearly $1,000 a year, according the U.S. Department of Health and Human Services. But this amount could quickly increase for uninsured individuals. With the average 3-day hospital stay costing $30,000 and a care for a  broken leg amounting to $7,500, it is well worth weighing the penalty not only against the cost of monthly premiums, but also against other potential healthcare expenses. While signing up for insurance imposes the monthly cost of paying for premiums, it also protects your finances in the case that you do require extensive medical care. Medical bankruptcy accounts for the majority of personal bankruptcies—getting insured is an important step toward making sure that you do not fall victim to piles of medical bills.

Tax Penalty Enforcement Procedures

The IRS reports that the tax penalty will be withheld from uninsured individuals’ tax refunds. For those expecting a refund and choosing to remain uninsured, the penalty will come out of your refund. For those who won’t receive a refund, bear in mind that the IRS is forbidden from imposing liens, levies, or criminal penalties in collecting the penalty. For these individuals, the penalty payment due could be taken out of future years’ refunds.  

Napala Pratini writes for NerdWallet Health. Learn more about affordable coverage on the Obamacare insurance page.

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