Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less. My name is Joshua Sheets and I'm your host. Today we continue our discussion on health insurance generally with a specific focus on Obamacare, specifically today.

I've been needing to get this out for a couple of weeks here and here and as I record this and release this on December 6, 2016, we've got just a little bit of about a month left before open enrollment ends for the healthcare exchanges. And so I obviously got to get this information to you if it's going to be useful.

So we're going to be doing a lot of health insurance this week and if there's anything less left next week as well. Today we cover three specific topics. I'm going to talk through the Obamacare penalty. I want to explain to you what it is, do some actual calculations so that you know how it impacts you.

Next I want to talk about what happens if you don't pay the penalty. And number three, I want to talk to you about how to get out of paying the penalty. That's the content of today's show. Before we get to that, a couple of quick announcements and one ad for you.

On announcement number one, as I mentioned on a recent show, I've opened up the Radical Personal Finance Facebook group to the community in general. I've had a couple of hundred of you who have gone ahead and joined us there and in the Radical Personal Finance Facebook community. It was previously limited only to patrons of the show.

At this point in time, it's now broadly available. So if you are a Facebooker and you've got questions or you'd like to interact with a very smart, very knowledgeable community of people, head on over to Facebook, search for Radical Personal Finance, and you will find the community Facebook group.

I invite you to join us there. Number two, big focus for this year, December here as we go into the year, I would really desperately like very much to raise the number of reviews for Radical Personal Finance with a specific focus on iTunes, but also some of the other platforms.

My target goal is to get to a thousand here within the next couple of months, and we're currently at about 333, actually not about, exactly 333. There are about 10,000 of you who listen every day on iOS devices. If you have an iPhone, if you could do me one quick favor, when you're at a traffic light, if you're listening to me while you're driving down the road, just pull open the Apple Podcasts app.

It's the app that's automatically installed on your phone. Pull that little thing open. Just search. Use the search function, search podcast, and you'll find it, or it's purple and it says podcast underneath. Use the Apple Podcast app and search for Radical Personal Finance in the store and just click leave a rating and review.

You can just simply leave a quick star rating for the show and one or two sentences on your phone would be perfect. It's largely about, at this point in time, as far as helping the show grow and attain visibility, the number of reviews is quite valuable and quite helpful.

Like I said, currently at 333. My target goal is to raise that number to a thousand here within the next month or two. So if you could help me with that, I would be deeply indebted to you. One or two sentences is perfect and it'll just take about two or three minutes right on your phone.

Super easy if you've never done that. Finally, quick announcement here in December, quick ad. I do phone consulting and I haven't made a big press on this, but I'm going to be doing a lot more press as far as announcements and advertisements and things for you. But I have been doing phone consulting with listeners of the audience.

At this point in time, I've been doing about 50 individual private phone calls. If you've ever thought about talking to me, if you hear some of the ideas and the things that I share and you'd like to get some specific advice on your specific situation, I encourage you to consider booking a phone call with me.

Let me read you a couple of reviews from some of the phone calls that I have done. You can find these on the Clarity profile, which you go to radicalpersonalfinance.com/phonecall. That forwards you through to the profile where you can book a phone call with me. Review here from LS.

"We had a very informative conversation with Joshua Sheets. We wanted help selecting a financial advisor for our family and he was very knowledgeable and helpful. He both expanded our thinking while at the same time helped us get focused on a decision." Another one from JR. "Amazing call. Once again, Joshua Sheets delivers tremendous value." By the way, these are all paid calls, not free calls or any gimmicks like that.

"BS, Joshua was well prepared and the call was a great use of my time and money. I left the call feeling more confident as I go forward with my upcoming financial decision." JK. "The opportunity to speak with Joshua personally was a valuable opportunity in itself, but our conversation yielded several useful takeaways.

This is the kick in the pants I was looking for." Finally, "Joshua is a very organized way when it comes to thinking about financial topics. He helped me finalize my decisions through this call." So a lot of your fellow listeners have booked consulting calls with me and have found a great deal of value in that.

If you're struggling with a specific decision, let me tell you this. Financial advice is not cheap when you measure it on a per minute basis. My hourly rate here is 300 bucks an hour, so that comes out to $5 a minute. That advice is not cheap when measured on an hourly basis.

That's just basically a standard professional rate. But in terms of the impact, I don't believe there's any better bang for the buck that you can get than good, useful, practical financial advice. So if you've ever wanted my input on a specific situation with you, I get a hopeless number of emails that I can't respond to at this point in time.

As I've opened up the Facebook community, there's a hopeless number of posts in there that I try to read and get a grasp of what's going on, but I can't respond to there. But money speaks, and I am presently offering this consulting call service. As we're here in December 2016, heading into a new year, if you are thinking about your financial goals for the next year, if you'd like some help organizing your thoughts and organizing your ideas on that, consider booking a phone call with me, RadicalPersonalFinance.com/phonecall.

Again, RadicalPersonalFinance.com/phonecall. I think you'd be glad you did. Let's go on and talk about Obamacare now. So thing number one, what is the Obamacare penalty? So to refresh, meaning, okay, we get that there's a penalty if you don't have health insurance, but we want to talk about how is it calculated.

To refresh your memory, it's important to recognize that given the nature of health insurance, recognizing that the legislative intent of the Affordable Care Act was to open up health insurance to every person in the United States. That was the goal, make health insurance available to every person in the United States.

The problem is that if you do that, it opens the insurance company up to the risk of adverse selection. It breaks the model because people who are sick and have a lot of health problems are much more likely to want insurance than those who are healthy and don't have any known health problems.

And so if the sample of insureds in a health insurance risk pool is not representative of the general population, then the actuarial tables that govern the pricing of insurance get broken. So because the legislative intent was to open up health insurance to every person, regardless of preexisting condition, regardless of how bad of a health risk somebody is, there had to be some kind of mechanism in order to try to ensure that the people getting health insurance would be reflective of the general population.

Now given that politically it was not feasible for the legislators in charge at that point in time to accomplish what I think most would have liked to have accomplished, which was to have a universal government-run health insurance system just like Medicare or Medicaid, because that was not politically feasible, they tried to find a compromise position.

And the compromise position was to incentivize all people to join the health insurance rolls by invoking a penalty for the people who chose not to buy health insurance. It was hoped that this penalty would incentivize 100 percent – of course they knew it wouldn't be 100 percent – but it was hoped that it would incentivize 100 percent of all US Americans to go into the world of health insurance, purchase and maintain health insurance coverage in order that the health insurance companies could have a risk pool that was actually reflective of the entire population because it included the entire population.

That was the goal. Now this penalty faced a couple of difficult legislative options. It was adjudicated all the way up to the Supreme Court and quite famously it was defended as it not being a tax and then it was called to be a tax. Anyway, we'll skip the legislative history of it.

But it was adjudicated up to the Supreme Court and the Supreme Court ruled that it was indeed a constitutional tax. It was quite the remarkable and interesting judicial history where the congress evidently unintentionally wound up advocating and establishing a constitutional tax based upon the ruling of the Supreme Court.

So that system of penalties or let's call it tax has been in place. But there's been a lot of confusion about it because it started off not being very much money. It started off being only a couple of hundred dollars in terms of the actual cost and many people made the decision that they did not value having health insurance to the degree that it would cost them premiums.

I'm not one of those who just automatically dismisses that. I think that it's your money and you can make a rational and careful and thoughtful decision about it and I think you should do so. I do not fault the many people who make a conscious decision to avoid having health insurance.

I myself do not have any health insurance. We'll cover that in a participate in a health sharing program. My intention is to do that with the next episode probably tomorrow. So I don't think it's irrational not to have health insurance. There's a cost and a benefit of all things and you have to weigh the costs and you have to weigh the benefits and you're the one who knows the most about your personal situation.

That's what leads to the problem of adverse selection. Those of you who are very healthy, who don't have any pre-existing health conditions, who aren't aware of any known maladies, who generally have a fairly safe lifestyle, I think it's a perfectly sensible and rational economic decision to say that I'll choose to self-insure the potential risk of my health expenses and I just simply will forego participating in the health insurance system.

In general, health insurance does provide a very important financial backstop against financial ruin. That's the proper role of health insurance. But when the cost of the premiums rises to the point where it's almost inevitable financial ruin based upon paying the premiums, the whole point of health insurance basically conceptually falls apart.

So in the beginning years, these penalties that were imposed for Obamacare were relatively small numbers, a few hundred dollars. I can't remember the first year was $195, $295, something like that. Today they've gone a little bit higher. So let's talk about how to actually calculate the fees so that you can understand the potential impact on your situation.

Now here I'm going to be referencing the information that is available directly from healthcare.gov. I'm actually going to read their paperwork and read their financial calculations to you from healthcare.gov. And this information is current as for 2015, excuse me, 2016. This is the fees for 2016. If you don't have health insurance or didn't have health insurance throughout 2016.

The fee that you would pay, they still call it a fee. They should call it a tax because that was what it was ruled as. Anyway, the penalty tax that you will pay is calculated in two different ways and you will pay whichever of these is higher. Again there are two calculations and you will pay the higher calculation.

These fees will adjust with inflation so you have to rerun the calculation each year. The first way that the penalty tax is calculated is based upon a percentage of income. And your tax, if you do not maintain health insurance coverage, will be 2.5% of your annual household income. Again your tax will be 2.5% of your annual household income.

Now there is a maximum on this. If you have a $1 million annual household income and you do not have health insurance, your annual tax will not be $25,000. The reason is that the maximum amount here is the total yearly premium for the national average price of a bronze health insurance plan that is sold through the marketplace.

So bronze premiums for a bronze insurance plan would be significantly below $25,000 per year. Bronze is the lowest tier plan that's offered and the bronze, silver, gold classification from healthcare.gov. And so that will be the maximum amount. The idea is if you're going to be paying 2.5% of your income and it's going to be at least as much as the cost of a bronze plan, then why would you not go ahead and get the health insurance policy?

That's the idea here. Recognizing also that of course we have the premium tax credits which make a substantial difference in the cost of the insurance programs for those who are lower to middle income. And those numbers as we referenced in episode 397 called the health insurance series part 3, the premium tax credit, what it is, how it works and how to maximize your cash from it.

As we referenced those numbers there in that show, the premium tax credit will have a high degree of impact on low to even middle to middle upper income households. So way of calculating fee number one, percentage of income, it's 2.5% of your household income subject to a maximum which is the average total yearly premium for the national average price of a bronze plan that's sold through the health insurance marketplace.

The other way that the fee is calculated is as a flat fee of $695 per adult and $347.50 per child under the age of 18. So let's just call it $700 per adult and $350 per child. Flat fee and this is how the penalty is taken out of the world of income because some people don't have a high income and so therefore this is where the penalty is taken out.

Now this calculation is subject to a maximum annual penalty of $2085. So if you were to run the math on that, let's just call it $2000 minus $700 for one adult in the household minus $700 for a second adult in the household, you're left with $600. Basically you wind up with two adults and two children in a household and you're going to be over the maximum fee, maximum amount $2085.

You will pay whichever of these numbers is higher. A few more details for you. When using the percentage method, only the part of your household income that's above the yearly tax filing threshold, which is $10,150 for individuals or $20,300 for couples filing jointly in 2014, which is the most recent year available, is counted.

If your income is below the threshold for a requirement to file tax returns, yes, it is possible for you not to be required to file a tax return if your income is low enough. If your income is below that threshold, you won't incur the penalty. But the income that is below that number is not counted in these penalties.

Using the per person method, you pay only for people in your household who don't have insurance coverage. Again, using the per person method, you pay only for people in your household who don't have insurance coverage. So your fee will not include people who do have coverage. If you have coverage for part of the year, the fee is 1/12th of the annual amount for each month you or your tax dependents don't have coverage.

If you're uncovered only one or two months, you don't have to pay the fee at all. So that's where one of the exemptions, if you're just missing coverage for one or two months, there is no fee, but if it's more than that, then the fee is prorated for each month that you don't have coverage.

And finally, you pay the fee when you file your federal tax return for the year that you don't have coverage. So let's do a few numbers here, some examples that the IRS gives us in their guidance documents here from healthcare.gov so that we can understand how this works. If you numbers make your eyes swim, just skip forward a couple of minutes.

Example number one, a single individual with $40,000 of income. Jim, who is unmarried with no dependents, doesn't have qualifying health coverage for any month of 2016. His household income in 2016 is $40,000. So it's simple. His per person fee would be $695 just for him. His percentage of income fee would be calculated in this way.

You take $40,000, his 2016 household income, subtract $10,150, which is the tax filing threshold for individuals in 2014, the most recent year available, which equals an annual income of $29,850. Then you take 2.5% of that number, 2.5% of $29,850 would be $746.25. The annual national average premium for a bronze plan is $2,448.

$746.25, which is Jim's percentage of income fee, is less than $2,448, which is the maximum percentage of income fee, so the maximum doesn't apply. But $746.25, Jim's percentage of income fee, is higher than $695, his per person fee. So his 2016 tax penalty would be $746.25, which he would pay upon the filing of his 2016 federal income tax return.

Now if he'd had partial coverage for any month of 2016, he would ... not partial coverage. If he'd had health coverage for any month of 2016, then he would just simply owe 1/12 of the annual fee for each month that he's uninsured. Example number two, married couple with two children, $70,000 of income.

Eduardo and Julia are married and have two children under 18. I guess I kind of assumed Julia, and it says Julia. Anyway, Eduardo and Julia are married and have two children under 18. No family member has qualifying health coverage for any month of 2016, and the 2016 household income is $70,000.

So first calculate the per person fee, $2,085, which is two adults at $695 each, plus two children at $347.50 each. Percentage of income fee, you take $70,000, subtract out the $20,300 tax filing threshold for married couples filing jointly, which equals $49,700, and take 2.5% of that, comes out to be $1,242.50.

You take the maximum cost of the bronze plan, average national premium for that size family would be $9,792 per year, and then you calculate, and obviously the percentage of income fee of $1,242.50 would be less than the maximum, so the maximum doesn't apply, but the per person fee of $2,085 is higher than $1,242.50.

Their fee would be the higher one of $2,085, which they would pay when they file the 2016 federal income tax return. Now, even just looking at that number, that would be a scenario that is common. Married couple, two children, $70,000 household income. They're going to be paying a $2,085 fee.

Is it rational for them to do that? Well, it depends on the cost of the bronze plan. Now, remember the bronze plan here is $9,792. There's a major cost savings there. Those cost savings would generally be offset by the premium tax credit. So I didn't run the numbers in preparation for the show, but they wouldn't be paying $9,792 because of the benefit of the premium tax credit.

But still, $2,085 is a significant discount in terms of, "Okay, fine. I got to deal with this." But now we come to the second part. Hopefully you understand how the fees work and you've seen how these fees have steadily increased over the last few years. Until now, they are substantial.

Most people are not going to choose, even if they have other reasons not to participate in the health insurance marketplace, most people aren't going to choose to incur a $2,000 fee when they could come up with some other option, including just simply buying the bronze plan, having the cost rebated by the premium tax credit, and financially it will make – it will tend in their direction where they'll just say, "Well, it makes more sense to go ahead and get the coverage through the healthcare.gov website." That's the whole point of it.

But here's the question. What happens if you don't pay the penalty? Now, this is one of the more interesting and controversial questions that I've been aware of for the last few years. I researched it as extensively as I could in preparation for this show. Still, I'm even in some ways uncomfortable talking about it because it seems so counterintuitive.

But at this point in time, the penalty for not paying – the consequences for not paying this penalty are limited. First I'll describe to you the situation. Then I'll read a couple – an article that goes into details. But basically, as I understand the current law and the current circumstances, the only way that the IRS – because the IRS was tasked with collecting these penalty fees.

The only way that the IRS can collect the Affordable Care Act penalty is if you choose to pay it voluntarily or if they take it out of a refund that is due to you. This is unlike any other tax law. In the United States of America, if you owe tax and if you do not pay your tax, the IRS has been granted the legal authority to impose significant negative sanctions on you.

These sanctions would include the garnishment of your wages. These sanctions would include the cleaning out of your accounts, bank accounts. These sanctions would include the repossession of – involuntary repossession of your property, of your physical property. They can come and take your physical assets, take your furniture, take your house, take your cars, all that stuff and sell it.

These sanctions even include prison. The IRS has legal authority to, upon successful judgment, lawsuit, etc., to put you in prison for not paying your taxes. The full weight of the law comes down upon you if you do not pay taxes. Now they generally only do this as an example.

The IRS depends upon voluntary taxpayer support, voluntary taxpayer participation in order to manage the tax system in the United States of America. If a large percentage of the population decided not to pay taxes, there would be no workable solution for the government authorities to impose their will on the population.

Best example would be the problem with immigration. People can – as far as illegal immigrants in the United States of America, there are millions, tens of millions of illegal immigrants in the United States of America. But nobody has any possible plan, no possible way to deport systematically all of those illegal immigrants.

And so we kind of continue in this uncomfortable detente situation where nobody can really do much about it except move a little bit of symbolism and try to get people to make actions on their own. That's why one of President-elect Trump's ideas that he promotes is – has an intended goal of encouraging self-deportation where people voluntarily choose to leave the country.

So with the tax system here, the tax system functions on the same basis. And so the IRS generally doesn't go after low-level tax for much of the time when you get audited or have a problem with the IRS. It's relatively low-level. Sometimes it's computer-generated inquiry, some simple back and forth.

They don't sue normal people with small incomes for tax fraud. They do sue high-profile people they can make an example out of. This is a way that you control a population is you make an example out of a few cases. This instills fear and respect among the population and most people voluntarily comply.

But the trick is that the Affordable Care Act penalty does not have – that the IRS does not have the same legal authority under today's laws, does not have the same legal authority to extract the tax. If you don't pay the penalty and if you don't pay it year by year by year by year, let's say you incur a $2,000 penalty and at the end of 10 years, you owe $20,000.

The IRS does not have the legal authority to garnish your wages for the $20,000 or to seize your property to pay the $20,000. They have to wait for you to send in a check or if you've made the mistake by sending in too much money for tax for other income tax, they can take it from a refund.

If you owe them $20,000 for the health insurance tax penalty and you are owed a refund because you had your employer deduct your wages and send that money in or you made quarterly payments for your income tax to the IRS and at the end of the year, you calculate things and you're owed a $5,000 refund, the IRS can legally choose to keep that refund and use that to work towards satisfying the $20,000 that you owe them.

But beyond that, I cannot find any evidence that there are any other enforcement mechanisms available to them. Now this story and these facts have been very interesting to me since for the last five or six years through the whole integration of the legislation. Now I didn't have to face that decision myself but I had researched it myself and I couldn't find any offsetting information but I always felt slow to want to talk about that publicly because it just seemed so out of character.

How could I be right about that? Here's an article from Kelly Phillips Erb from writing in Forbes magazine, at least the online edition, from February 26, 2015. Last month, the Obama administration announced that between three and six million households, about two to four percent of taxpayers, would be faced with a penalty at tax time for failing to secure minimum essential coverage to comply with the Affordable Care Act, sometimes referred to as Obamacare.

Under Obamacare, you're considered covered if you have insurance through the government, including Medicare, Medicaid, CHIP, retiree coverage, TRICARE or VA health coverage, private insurance that you purchased on your own, including COBRA coverage, and coverage obtained through the health insurance marketplace or provided by your employer. You'll report coverage on your tax return, blah, blah, blah.

Most taxpayers, about 130 million or so, will report coverage. Of those who don't have coverage, estimates range from 20 million to 37.5 million, most will avoid being subject to the penalty based on a waiver or exemption. We'll talk about exemptions in a minute. Those taxpayers who can't demonstrate essential minimum coverage and aren't otherwise exempt are subject to a penalty.

The shared individual responsibility payment equal to one percent of income above the filing threshold or $94. These numbers are out of date. It goes on. So the numbers that I just gave you are current. In terms of dollars, the Congressional Budget Office had initially estimated that by 2016, nearly 6 million taxpayers would be subject to an average penalty of $1,200.

The overwhelming majority, 80%, of those estimated to be at risk to the penalty were those in the middle class with incomes between $55,850 and $115,250. Since that time, the numbers have been adjusted downward, based largely on the perceived success of policies purchased through the marketplace and the increased number of taxpayers exempt under the rules.

Those estimates between 3 and 6 million households are still just guesses, but the dollars associated with those numbers are the real mystery. You see, buried in the language of the 2010 law creating the Affordable Health Care Act is a bit of an out. There are practically no real consequences for not paying the penalty.

I mentioned this to Maggie McGrath, personal finance reporter for Forbes, while shooting video about the Health Care Act earlier this month. Shouldn't that be the real story, she asked? She's right, of course. It should, but oddly enough, nobody is really talking about it. Why so quiet? Here's my guess.

Nobody has a clue what's really going to happen. You see, when the Act became news in 2010, rumors were flying about what would happen if you didn't pay the penalty. It was politically tricky. The consequences needed to be enough to make you want to conform with the Act, but not so onerous that Congress would be loathe to vote for it.

The final language in the Act declared that the penalty "shall be paid upon notice and demand," which sounds really intimidating. The language went on to note that the penalty would be "collected in the same manner as an assessable penalty under Subchapter B of Chapter 68," which also sounds pretty serious, especially since Subchapter B references some pretty nasty penalties for otherwise not complying with other sections of the tax code.

So what would the penalty for noncompliance be? Jail time? Nope. The language in the Act specifically rules out jail time, saying at section 500A(g)(2)(a), "In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure." So no jail time.

But that means that the IRS will chase you and lean your property if you don't pay, right? That's not allowed under the Act. You guys insert my own comments here. Remember the famous quote, "We have to pass the bill so that we can read it and find out what's in it"?

Here are some of the consequences of that type of approach to lawmaking. Nope, that's not allowed under the Act. At 500A(g)(2)(b)(i), "The Treasury cannot file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty imposed by this section." So no liens.

Then clearly there will be levies or seizures on your wages and account, right? Nope, not that either. Under 500A(g)(2)(b)(ii), "The Treasury cannot 'levy' on any such property with respect to such failure." To recap then, by law you have to pay the penalty. But if you don't, you won't go to jail, you won't be leaned, and you won't be levied for collection.

Is there anything that could happen to you if you choose not to pay? With no jail, no liens, and no levies, it doesn't leave the IRS a lot of room to work when it comes to collections. Congress actually managed to create, as I wrote in 2012 and in 2013, "an incredibly complex and burdensome law without any teeth." Well, maybe some teeth, baby teeth.

The IRS might seize any part or all of your refund in order to satisfy your obligation. Might. IRS hasn't come right out and said that it absolutely will offset your refund if you owe a penalty for failure to pay. However, in the final regulations issued on this matter, IRS noted that "Nothing in this section prohibits the Secretary from offsetting any liability for the shared responsibility payment against any overpayment due the taxpayer, in accordance with Section 6402(a) and its corresponding regulations." That's sufficiently passive-aggressive, right?

You're on notice that the IRS doesn't think that it's barred from taking your refund. They're not saying they will, for certain, but they're not saying they won't either. So is there anything you can expect for sure? You can definitely expect a lot of letter-writing and virtual shaking of the government's fist at you, maybe even some blustering for good measure.

But real consequences? Other than that potential refund seizure and a guilty conscience, there's nothing to keep taxpayers from opting out of paying. Will they? We'll have to wait and see. Plus ends the article on Forbes by Kelly Phillips Erb, who writes on taxes there. Interesting, huh? My current opinion and understanding is that if you choose not to pay the imposed penalty tax for not having health insurance coverage, there are very few negative repercussions that you can expect under the current law.

That's the best that I have been able to figure out. Now, you should make sure, for your own safety, that you never wind up in a situation where you're expecting a significant refund from the IRS. That's a matter of good practice regardless. Now, it's not always avoidable, but in general, try to work out your exemptions and your withholdings and your quarterly tax payments and such to the point where you're going to have about a neutral scenario.

You don't want to get a big refund back at tax time, nor do you want to owe a big check. If you owe a big check, you could be subject to penalties for underpayment of tax on your quarterly or withholding calculations. But if you get a big refund back, you've given up utility of the money and you've given it to the government at a 0% loan and you've subjected yourself to a whole lot of hassle to get it back.

Now, lots of people do that because they consider that their savings policy. Okay, if you want to do it, fine. I don't think the IRS is a very good bank. It's kind of hard to get money out of them sometimes. They have all the legal teeth and you have nothing.

So in general, you should calculate your taxes as close to zero as you can. It's not always possible, but that's the goal. I don't think it's a huge concern if you choose not to pay the penalty as long as you avoid that refund situation. Now, my concerns, I wouldn't advocate for that.

My concerns are a fewfold. Number one, you still have to face the reality that you don't have any significant health insurance coverage. In general, that's not the best plan. In general, it's better to have health insurance coverage. That's important. Number two, the concern with legislation is I don't see any reason why that legislation cannot be changed.

Legislation can be changed. It often is. So if this were to be a problem, let's pretend that we continued with a president-elect Hillary Clinton in today's world rather than a president-elect Donald Trump. If there wound up being a tremendously high nonparticipation rate by American citizens choosing not to pay the penalty fee, I don't see any reason why they wouldn't change the law and simply give the IRS more teeth.

Under those circumstances, I think you could change and you could make the argument, "Well, if that happens, I'll go ahead and consider paying the taxes. But in the meantime, I've had use of the money. I can grant that argument." Now, the third thing is everything regarding the Affordable Care Act at this point in time is uncertain and due to the election of president-elect Trump who campaigned upon a promise of repealing and later repealing and replacing the Affordable Care Act legislation.

This is also interesting to watch given the Republican majority in the House and the Senate because when this legislation was passed, it was purely done on party lines. Every Republican voted against it and every – I don't know if all Democrats voted for it but at least all Republicans opposed it.

So given the massive win, the landslide win based upon the Republican political party, there is little – I don't see any major political will that the Republicans – any reason for the Republicans not to work towards repealing it. The challenge comes from the basis of replacement because there are so many millions of people who had pre-existing conditions, who were rightfully cut out of the health insurance marketplace that the political bad PR of Republican House, Senate and president saying, "We're now going to eject all these people from the health insurance rolls," that bad political press, it's hard for me to imagine them having political will to stand up against that.

Now, maybe they would, maybe they wouldn't. It's hard for me to do that. Compassion and the goals of compassion seems to be the driving force of our political ideology and compassion for the few is of primary importance and I haven't seen any serious proposal that to me has made sense that it can work in order to manage the political realities with the financial realities.

Time will tell. We will see. We will continue to observe and see what happens and I'm thankful that I don't have that job. I would be remiss if I didn't point out that you – even though these technical financial considerations, they're practical but none of them solves the ethical question of whether you should or should not pay the penalty tax.

And on that, I will leave that to you. I find that a very difficult question to answer and I will simply say that in a past tax year when I owed a penalty due to non-possession of health insurance for myself, I – for a period of time, I chose to pay the penalty.

You have to make your own decision. Now, let's talk about some exemptions here because yes, you can choose not to pay the penalty and that's quite interesting and somewhat – well, it's provocative and interesting. But let's talk about some exemptions because there are other exemptions and I've very rarely heard these exemptions discussed and perhaps you'll find an exemption here that will cover you.

Obviously, the simplest way to avoid paying the penalty tax is by having qualifying minimum essential health insurance coverage and the Affordable Care Act has been effective at making that possible for all people. If you remove the problem of pre-existing conditions, that's what the Affordable Care Act did, and if you remove the problem of so-called affordability, which is what the premium tax credit as well as the expansion of Medicaid effectively does for most people, there are very few non-ideological reasons to participate in the federal health insurance programs.

So for most people, they can simply avoid the penalty by signing up for insurance and that's what most people do. Now, the challenge here becomes if the pricing changes and that's what has dogged the heels of the Affordable Care Act legislation and it only appears to be getting worse.

Because the market was so fundamentally unstable, it was so financially poorly calculated, then there doesn't seem to be any way that the marketplace can continue based upon the current prices. Now, that doesn't necessarily reflect, in my opinion, through to the general population because most people who are lower and middle income people are receiving that premium, who are not participating at their work, et cetera.

I'm talking about the people who are enrolled through healthcare.gov. Because most of these people are receiving the premium tax credit and because their premium is calculated based upon affordability, they're not seeing the true cost and the true cost increases. It's only the accountants who are seeing that. So most people are not upset who are on the health, the actual impact of the rising premiums seems to be relatively controlled for most people who are participating in the Affordable Care Act and who are receiving the premium tax credit.

It's only behind the scenes that the costs are falling apart. So most people can just simply choose to sign up for and get the Affordable Care Act coverage. There are markets where this is changing. There are markets where a significant number of insurers are pulling out of the healthcare.gov marketplace.

They are losing money hand over fist and this change of supply is also having some significant impact. But you can sign up for insurance and there are lots of reasons. There's open enrollment. It's available every year. Plus there are lots of qualifying life events. If you recently get married, if you recently get divorced, if you had the birth of a child, those are ways that you can sign up and get coverage.

You can also buy qualifying health insurance coverage through your employer. You can still in theory buy it on the private market or you can qualify for Medicaid if your income fits into the appropriate numbers. But the Affordable Care Act legislation does list a couple of important exemptions. Let's talk about those so that you know what they are.

The first one which to me is actually one of the more interesting ones is homelessness. If you qualify as being homeless, you can maintain an exemption from that Obamacare penalty. Now, the reason this is interesting to me is my brain works where I generally look for the angles on things.

For example, Medicaid is not based upon – at least in my state and in most states as I understand the law – Medicaid is not based upon the number of assets that you have. It's based upon the amount of income that you have. So there are many of you who are listening to the audience and there are many people who I've interviewed and profiled on the show who live on a very small monthly budget when measured by their expenses.

It doesn't mean that they're broke. They just don't have a lot of income. This is highly advantageous when it comes to tax planning. It is absolutely possible that you, if you lived in a paid-for house or had living arrangements that didn't require a high amount of monthly rent payments, simplest one would be a paid-for house in an area with low property taxes, etc.

If you had a paid-for house, no debt payments, cars weren't functional but no monthly payments, you could live a very comfortable lifestyle, especially in our modern economy, on relatively little income, which requires you, regardless of the amount of your net worth, to not pull a lot of income off of your portfolio of assets.

It's very doable. If you compound that approach, no house payment, minimal property taxes, no significant asset payments like car payments, if you compound that with some appropriate investments that allow you to shelter some income through depreciation expenses or depletion expenses, and if you compound that with having your own business, which allows you to offset any portion of your expenses that are due to your business activities, it's very possible that you could live a great lifestyle on a relatively low income and be perfectly comfortable.

Well, that relatively low income could, in theory, checking on the numbers in your state, allow you to qualify for Medicaid and thus to be exempt from the health insurance coverage, excuse me, the penalty taxes, and to get health insurance on the dole without you having to do anything. If you were alternatively forced with, let's say, paying expenses of a couple thousand dollars a month for health insurance, which would not be unreasonable in some situations, that could be a significant savings.

That's also available to you through the premium tax credit system. So we wind up with this very interesting and strange effect of the US tax code where you're penalized for earning a lot of money, but you're not penalized for being rich. You're penalized for earning a lot of money.

Well, if that's the way the law is written, then if you can fit your lifestyle expenses onto a smaller budget, just earn less money. So whenever I read a regulation, back to the Power of Choice series that I did in previous episodes of the show, whenever I read a regulation, I just want to know, "Okay, what defines that?

How do you know that?" And so hardship category number one is actually extremely interesting to me. All it says is, "You were homeless." So I'm here reading the ... Right in front of me, I have the hardship exemption application that would need to be submitted for approval when filing taxes based on the healthcare.gov, and it tells me that I need to submit documentation.

So let me read this document to you. Page three of six of the official document that I found on healthcare.gov while reading about the health coverage exemptions. Hardship categories and documentation. You must provide documentation that one, supports the reason that you're requesting the exemption, and two, includes dates showing when you experienced the hardship.

So here's hardship number one, category one. You were homeless. Those are the stated ... That's the state that is being described. You were homeless. You were without a home. Stated documentation, none. So then I go on and I read the application here. It says that I need to put in my name, my address, or leave blank if you don't have one.

I need to put in my city, my phone number, my email address, my preferred spoken language, my preferred written language. I need to give them information about my tax household, tell them about the people in my house. Now here where I talk about the hardship, I choose option one, homeless.

The tax year for which I need the exemption, the date the hardship started, and the date the hardship ended. Check if ongoing. Read print, I'm signing the application. So basically all it requires me to say is to affirm that I'm homeless. I find that to be an interesting definition.

But if you were homeless, then you may be eligible for the hardship exemption here to help you avoid paying the Obamacare penalty. I don't know what the definition of homeless is and I don't see any guidance in the documents. So you'll have to decide if you are homeless or not.

Number two, hardship category number two, you were evicted or were facing eviction or foreclosure. Either you would be required to submit documentation of your eviction or of your foreclosure notice within the last three years. Now this one was confusing to me because on the application it says that they require documentation of the eviction or foreclosure notice in the last three years.

But on the instructions, which I also read, it indicates that if you were evicted in the past six months and were facing eviction or foreclosure, then that would be a problem. I don't think that would be useful for the majority of the listening audience, but you should know that is an exemption.

Next one, same category, hardship number three, you received a shutoff notice from a utility company. You must submit documentation of a shutoff notice from a utility company which state service has or will be shut off. And this must be within the last three years. Probably not a factor for most of you.

Number four, you recently experienced domestic violence. Required documentation, none. Now this is one of those areas where it's not fun to talk about because it affects people so deeply. And I don't know how they would even indicate this because – or how they would even – I don't know how they would know whether to approve the hardship exemption or anything like this.

What is domestic violence? Now we understand conceptually what that means, but what is it actually? What's the definition of domestic violence and how do you demonstrate it? I don't know the answer to that. So I will just simply read it to you and move on. Number five, you experienced the death of a close family member within the last three years.

If that's the case, you may qualify for a hardship exemption. Proof of documentation needed, death certificate, death notice from newspaper, funeral service program, funeral expenses, coroner's report, military notification of death or other official notice of death. That one would just simply be something to be on your radar screen that if you experienced the death of a family member, you should apply for this exemption.

Six, you experienced a fire, flood or other natural or human-caused disaster that caused substantial damage to your property. Proof of documentation, police or fire report, insurance claim or other document from a government agency or news source about the event that occurred within the last three years. Category seven, you filed for bankruptcy, must submit official bankruptcy filing documents within the last three years.

Eight, you had medical expenses you couldn't pay. That's the hardship exemption that you can apply for. So you must submit medical bills from the last three years. Nine, category nine, you experienced unexpected increases in necessary expenses due to caring for an ill, disabled or aging family member. Now this one I think has promise for some of you listening who are looking to avoid the exemption, excuse me, avoid the penalty.

Many of us would fall into this situation where we have unexpected increases in necessary expenses due to caring for an ill, disabled or aging family member. I don't know what unexpected increases are. I do know that most families who are caring for an aging family member find themselves paying much more than they thought.

I don't know what necessary expenses are. There's no further indication of what that is. The documentation that you need to submit for this is receipts for bills or services related to care like medical bills, home care services or transportation receipts from the last three years. That's category nine. Category 10, a child you expect to claim as a tax dependent has been denied coverage in Medicaid and the Children's Health Insurance Program, CHIP, and another person is required by court order to give medical support to the child.

In this case, the court, you have to submit a court order that covers the time period for which you want the exemption for the tax dependent and copies of eligibility notices showing the dependent has been denied Medicaid and CHIP coverage, must be within the last three years. So this is one should just simply be on your radar screen.

Eleven, as a result of a health insurance marketplace appeals decision, you're eligible either for one, enrollment in a qualified health plan through the marketplace, two, lower costs on your monthly premiums or three, cost sharing reductions for a time period when you weren't enrolled in a marketplace plan. In this case, you must submit documentation of health insurance marketplace notice of appeals decision.

The notice must show the names of everyone in your tax household who wants this exemption. Twelve, an adult in your tax household was determined ineligible for Medicaid because your state did not expand eligibility for Medicaid under the Affordable Care Act. This is for those of you in states that are required to expand their Medicaid rolls to include households who are earning up to 133% of the federal poverty level guidelines.

And so if your state did not do that, then you would qualify for Medicaid, but because your state didn't increase the Medicaid, then you might qualify for the exemption from the penalty. Submit notice of denial of eligibility for Medicaid. The notice must be from a date during the time period for which you're requesting the exemption.

Number 13 and number 14 here are our final two. You got a notice from a current health insurance plan that you purchased on the individual market, not job-based coverage, saying your policy will be canceled because it doesn't meet Affordable Care Act requirements and you consider other available plans unaffordable.

This one affects probably a lot of people. They got a notice. Many, many health insurance plans were canceled. This was the most frustrating thing when I was doing health insurance was I had prior to 2010, I had sold a number of health insurance policies. And what I'd like to sell was I didn't do much group insurance, but what I did was I just – there were just awesome individual health insurance policies available, cheap, just pure catastrophic coverage, which is my favorite model for health insurance.

For people who are healthy, it's the best model. If you're sick, it's not. But just pure catastrophic coverage, individual policy, not connected to any work, very high deductible, very, very low premium. Well, the vast majority of those were canceled. First premiums were raised and then they were just canceled.

I had many unhappy clients who liked that approach. But because of the requirements for minimum essential coverage, all my male clients had to have policies that had coverage for pregnancy and had to cover all this stuff and the premiums went up and the policies were no longer eligible. So if you got a notice from a current health insurance plan that you purchased on the individual market, not job-based coverage, saying that your policy will be canceled because it doesn't meet Affordable Care Act requirements and if you consider other available plans unaffordable, you qualify for an exemption from the penalty tax.

You must submit documentation which contains a notice of a cancellation from the insurance company and the notice must show the names of everyone in your tax household who wants this exemption. Finally, number 14, you can apply for an exemption if you experienced a hardship that kept you from getting health insurance that's not listed in the previous 13 categories.

If so, you would take that on an ad hoc basis. Those are the hardship exemptions. And by the way, the process for these is that you submit an application to the healthcare administration, they send you back a letter, notice of approval, something like that, and they give you an exemption certificate number if you qualify and that's the exemption certificate number that you would list on your tax return.

So there is a process of submitting an application and then receiving approval or request for additional information, etc. from them. But those are the hardship exemptions. Now there are other exemptions which you also need to be aware of. Those are only simply the hardship exemptions. But it's good for you to have those on your mental radar screen.

I hate to overuse the cliche but just to be aware of them so that if you or a friend is in that situation that you know of them so that you can avoid paying that penalty which could be substantial for some people. Because oftentimes what happens, here's why this is so important, why I labored through all 14 of those categories.

Many times people don't have health insurance because their life is in turmoil. They've gone through the death of a family member, they've had a serious illness, they've lost their job, they've been evicted or foreclosed, etc. These are the circumstances in which people often wind up just everything falling apart and they focus on survival as they should.

So focus on paying for food and putting gas in the car so they can go to a job interview, etc. Things like health insurance fall behind. But they often don't go through and try to apply for all of the situations or maybe it's not open enrollment period and thus they're not eligible to apply for coverage through healthcare.gov or they just don't get around to it.

Well, if you're aware of these hardship exemptions, you may be able to help somebody save a significant amount of money when it comes time to filing their taxes. So you should be aware of them. Let's talk about some of the other exemptions because some of these other ones are important.

There are some income exemptions. I already mentioned earlier that if you don't have to file a tax return because your income is below the level that requires you to file, which that number again is about 10 grand for an individual, 20 grand for a couple. If you're below that level, then you automatically aren't going to be paying the penalty tax.

So if your income is below the amount requiring you to file a tax return, you are going to be exempt based upon income. Also the other income related exemption is this. You'll be exempt from the penalty tax if the lowest price coverage available to you through either a marketplace or job-based plan would cost more than 8.13% of your household income.

So if you're being offered coverage but it's just a much higher percentage than either through your job or through a marketplace, then you could qualify for the income related exemption. There are a couple of coverage related exemptions. I read the one that talked about if your state didn't expand its Medicaid program.

Also I mentioned earlier, if you were uninsured for no more than two consecutive months of the year, then you would be exempt from the penalty tax. There are some group membership exemptions and here are some of the more interesting ones. One, if you're a member of a federally recognized tribe or eligible for services through an Indian health services provider, you are exempt from the Affordable Care Act tax penalties.

A federally recognized tribe is any Indian or Alaska native tribe or Alaska native claim settlement act, corporation, regional or village, band, nation, Pueblo, village, rancheria or community that the Department of the Interior acknowledges to exist as an Indian tribe. If you're a member of an Indian tribe or eligible for services through an Indian health services provider, you can be exempt from the penalty tax.

Also the next one is if you are a member of a recognized healthcare sharing ministry. That's the next episode. We'll talk about those in detail. But if you are a member of a recognized healthcare sharing ministry, you can be exempt from the penalty tax. This is what I do.

Also if you are a member of a recognized religious sect with religious objections to insurance, including social security and Medicare, then you can be eligible for an exemption from the Affordable Care Act tax penalty. Now this is a category that should be very inclusive of many people, but unfortunately due to people bowing down and rolling over to get as much money from the government as possible, this is very, very limited.

Basically just think of the Amish. There are a couple of other small religious sects that qualify. But in order to claim this exemption, you have to be a member of a religious sect or division that is recognized by the Social Security Administration as conscientiously opposed to accepting any insurance benefits, including social security and Medicare, and that must have been in existence since December 31, 1950.

Unfortunately for most of us, our forebears rolled over when they shouldn't have, and that will not apply to most of us. Next exemption is if you're incarcerated, then you are exempt from the Affordable Care Act tax penalty. And finally, if you are a US citizen living abroad, a certain type of non-citizen or not lawfully present in the United States, then you can qualify as being exempt from the Affordable Care Act tax penalty.

The term lawfully present includes immigrants who have "qualified non-citizen immigration status without a waiting period, humanitarian statuses or circumstances, or valid non-immigrant visas, etc." Now, of course, the one that's interesting that you should also pay attention is the US citizen abroad exemption. If you're a US citizen living abroad, and here are the definitions of that, because for those of you in the perpetual travel world, etc., you should pay attention to this.

That means that you are a US citizen who either spent at least 330 full days outside of the United States during a 12-month period, or was a bona fide resident of a foreign country or countries for a full tax year. Or it means that you're a resident alien who both was a citizen of a national – citizen or national of a foreign country with which the US has an income tax treaty with a non-discrimination clause and you were a resident alien who was a bona fide resident of a foreign country for the tax year, or if you're not lawfully present in the United States.

And then those are – so that's a key factor. For those of you who are into the world of perpetual travel or who live outside of the United States, one major thing that that can be compelling in your tax planning is not only will you most likely have significant lower health insurance costs depending on the country or the region that you're in, depending on how that's structured, but you will at least be eligible for this exemption from the US tax penalty.

So if you've made it this far, congratulations. We've worked through that to go through all of those different categories and I congratulate you on having the focus to be able to be here an hour and five minutes later where we've gone through those details. But those are the details of exemption from the penalty.

Now that penalty used to be insignificant. Here's why I focus on the show. Number one, the information needs to be out there and I'm not aware of it out there in a podcast format. But the penalty used to be insignificant. Today that penalty is significant. It can be many thousands of dollars.

And so you need to know about these exemptions. There are a few of these exemptions that will probably be of particular interest to the listening audience. For example, as I said, the US citizen abroad exemption or perhaps that homelessness exemption or perhaps that care of an aging relative exemption, some of the income-based exemptions.

These will be of interest to you. So in summary, some of your strategies to be able to avoid the Affordable Care Act penalty tax, which is the focus and the title of today's show, are these. Of course, number one, just simply get health insurance. A couple of ways to do that.

Remember, the premium tax credit is substantial and it substantially offsets the price of the health insurance. And under the current law, any person who wants to can go and sign up for health insurance coverage under the Affordable Care Act system of health insurance exchanges at healthcare.gov or write an open enrollment for that.

On the healthcare.gov website, you will submit your application, put in your information for your income, et cetera, and they'll tell you what your monthly premium would be. And for most people, it's relatively low. If you would like to increase your subsidies, then simply reduce your income. And those subsidies will go up as your income goes down.

You're incentivized to earn less money in order to have the government pay more of your health insurance costs. You can get that down if you can get down below that federal poverty level and still be able to live somehow. You can get that down to the point where you'll qualify for Medicaid independent of the amount of assets that you have.

So there is very little cost to health insurance for people who have a low income. If you have a medium to high income, then of course that cost will be more significant. But if you have a medium to high income, then there are very few reasons not to engage in proactive planning regarding your health insurance coverage.

It is important. It's important financial protection. It's important coverage to protect you from the risk of catastrophic health expenses. Now if you choose not to maintain health insurance coverage, then you can just simply pay the penalty. And depending on those calculations that we did, it may or may not be high.

Or you can do as I explained and simply choose not to maintain health insurance coverage, not to qualify for an exemption, and just don't pay the penalty. That is a perfectly reasonable strategy if that fits the details of your circumstance. And under the current law, there are very few if any teeth that the IRS has to get the money out of you.

So you can choose to keep it. Just simply don't pay the penalty. If you pursue this route, the route of not maintaining health insurance coverage, remember that there are some other alternative ways that you can adjust your health, your insurance expenses so that they'll support you in that decision.

So the simplest, most obvious example is if you are not going to maintain health insurance coverage, you should focus highly on being as healthy as possible. So perhaps you should allocate a higher percentage of your budget to higher quality food or to a more appropriate exercise regime that's going to allow you to maintain a higher degree of health or to proactive medical care that you are preventive medical care to help you maintain your good health and lessen the risk of catastrophic health expenses.

You can also adjust some of your other insurance programs. Something as simple as disability insurance can be very helpful. Long-term care insurance perhaps can be a way of offsetting the health insurance risks. These do not cover all your health expenses, but they can be helpful. Investigate a strategy such as this, increasing the liability insurance coverage on your property coverages, liability insurance coverage for your house and for your car.

If you have higher amounts of coverage for medical expenses on your car insurance, if you think that it's most likely that you're going to get injured in an accident, let's say that you're young and you're healthy and you say, "Hey, if I got injured, I'd probably be injured in a car accident." Well, then consider increasing your medical coverage cost on your car insurance.

That may be significantly cheaper than having health insurance and if your calculation is correct it might cover you for your situation. Or perhaps you engage in some sort of motorsports activity. Well, can you make sure that you have medical coverage on your liability coverage that has a rider on it covering your participation in that motorsports activity such as your four-wheeler or other things that are associated with your house or your RV coverage or whatever it is.

Read your liability and property insurance documents carefully and see if you can expand some coverage there and perhaps that will protect you from the risk of accidents. You should also obviously pursue ways to reduce costs such as understanding medical tourism and looking for other strategies or if you just need to just consider going and getting a job that you take and keep purely for the health insurance coverage.

So there are many, many options and I hope some of these will spark some creative ideas for you. My favorite options are health savings accounts which, excuse me, before I get to my favorite one, the challenge with this show is that we are in a bit of legislative limbo and so time will tell what happens and it'll be interesting to watch.

I hope this information is current for a while. Now a couple of options that have been my favorites in the past to put as much of – to just simply use insurance as a catastrophic protection and put as much of the normal day-to-day cost as coming out of your checking account as possible.

That's why we'll talk in detail about health savings accounts. I think they were fantastic inventions a number of years ago and we'll see what happens with them in the future. And also we'll talk about healthcare sharing ministries because I believe that if you meet the qualifications of participation in a healthcare sharing ministry, then I believe that will be a useful option for you.

And my intention is that that will be the very next podcast for you. Thank you so much for listening to today's show. If this information has been helpful to you, I would ask you humbly to – I would ask you for your financial support. Please consider becoming a patron of the show.

The reason that's important is it helps me to bring you the content that I bring you with the regularity that I bring it to you and to do so free of commercial encumbrance, to do so free of many entanglements and having divided interests. My goal is to serve you, my listening audience, and I've sought to set myself up in a way where the incentives, my financial incentives for this show are aligned with your best interests.

But that only works if you voluntarily choose to support me financially. One good way to do this is become a patron of the show. Go to RadicalPersonalFinance.com/patron. Sign up to become a supporting patron of the show. It can be as little as a buck a month. If every listener of the show supported the show at a buck a month, that would be – I would limit almost any other commercial thing and I would just focus on you guys every day and I would continue growing it.

Now I don't expect that to happen. Basically it winds up that about 2% of the listening audience signs up to support a show, maybe even less at this point in time. But I ask you, consider becoming a patron at RadicalPersonalFinance.com/patron or if you'd like to get my personalized advice on your situation, including topics such as these, these are the kind of thing that I talk about in consulting calls where I can explain to you the exemptions and explain to you your options.

If you say something like, "Hey, Joshua, I don't have health insurance. I don't sell insurance. I can't make recommendations because I no longer maintain an insurance license. I can't make recommendations on your buying or not buying insurance." But I can say, "If you don't have insurance, then you should consider strategies like I said such as adjusting your liability coverage on your car to make sure that it's covering medical coverage," things like that.

These are useful and important planning opportunities regardless of the path that you take. Thank you for listening. Be back with you soon. and be back with you soon.