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How the feds will know if you have health insurance

Starting next year the Patient Protection and Affordable Care Act will require most Americans to have health insurance.

That means unless you qualify for an exemption under the law, you'll have to buy a health plan if you don't already have one through work, a government program (such as Medicare or Medicaid) or an individual health plan. If you meet certain income requirements, you could get a tax credit to help you afford coverage.

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But how will the government know if you have health insurance -- and how much of a penalty will you pay if you don't?

Those are among big questions federal officials are addressing as they write final rules for how to put the individual mandate into effect. The mandate -- the provision requiring you to have health insurance in 2014 -- remains the most controversial part of health care reform.

Why your 2012 tax return is important

Tax professionals are telling clients this tax season about the important changes ahead. The 2012 return you file this year will serve as a baseline for whether you qualify for a tax credit to help you afford coverage in 2014.

tax returns and health insurance"This is why it's so important for consumers to get educated," says Meg Sutton, senior adviser for tax and health care services at H&R Block.

According to a survey last fall by the Tax Institute at H&R Block, 77 percent of respondents were unaware that the 2012 tax return would serve as a baseline for subsidies. And 44 percent of respondents ages 18 to 34 were unaware of the tax penalties they could face if they fail to get coverage in 2014.

H&R Block tax professionals are doing a tax and health care review for all clients during this tax season. The review includes whether clients will be eligible for tax credits to buy health insurance and the potential for tax penalties if they don't get coverage in 2014.

Reporting health insurance coverage

The health insurance coverage you have in 2014 will be reported to the federal government. Health insurers, employers that sponsor health plans and agencies that administer government health plans will file annual reports to the IRS about who is covered under their plans. They will also provide the people they insure with documentation about the coverage.

Starting in 2015, when you file your tax return for the previous year, you will report whether you and your family members had health insurance coverage. The exact forms you will file have yet to be determined, Sutton says. Details will be clarified as 2015 approaches.

If you did not have health insurance in 2014 and also are not exempt from the mandate, you will pay a tax penalty.

At first, the penalty will be small, but it will grow each year.

• In 2014, the penalty will be $95 per person or $285 per family of three or more, or 1 percent of taxable income, whichever is greater.

• In 2015: $325 per person or $975 per family of three or more, or 2 percent of income, whichever is greater.

• In 2016: $695 per person or $2,085 per family of three or more, or 2.5 percent of income, whichever is greater.

After that, the penalty will increase according to a cost-of-living adjustment.

Sutton says the penalty will be subtracted from your income tax refund. If you do not get a refund, the penalty likely will be subtracted from any future refund the government owes you.

Some insurers have said the penalties are too low, but health economist Austin Frakt, an assistant professor at Boston University School of Medicine and School of Public Health, maintains they may be high enough.

"Insurers may be correct that the penalties in the first two years will be too low, but it is harder to make the case that the fully phased-in penalties will be too low," he writes in a Jan. 17, 2013, article in the Journal of the American Medical Association.

Carrot-and-stick approach

"The mandate comes in a carrot and stick format," says Steven Zaleznick, executive director for consumer strategy for HealthPocket, a Sunnyvale, Calif.-based company that compares and ranks health plans.

The "carrots" include the tax credits that will help moderate-income Americans afford health insurance as well as the numerous consumer protections provided under the Affordable Care Act. Starting in 2014, health insurers will not be allowed to charge higher premiums for or reject applicants with health conditions.

In the early years, Zaleznick says, the carrots are more important the stick.

"In 2014, it's really about making sure the plans come into the marketplace and are understandable by consumers, and letting people know there are subsidies in place to make it do-able," he says.

More from Barbara Marquand here

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