Avoiding the Individual Insurance Mandate Penalty in 2018

*The information contained in this post is not meant to be specific for you or your situation and is not meant to be financial advice, as I am not licensed as a financial planner or as an accountant. Before making any decisions, I strongly recommend speaking to someone licensed in this area to consider your unique situation.

Planning Our Big Trip

If you’ve been keeping up with the blog this past month, then you know that I am planning to semi-retire in 2018, and Whitney and I are going to be going on a 5-6 month international trip throughout Europe, Africa, and Asia! If you haven’t been following the blog for the past month, then what are you waiting for?! There’s going to be all kinds of exciting content this year, so click the follow button on the right side over there! ⇒⇒⇒

We are very excited about our trip, but there are still several things that we need to get squared away first that have been bothering me. One of the main things is what we’re going to do about health insurance while out of the country. Once we leave our jobs in July, we will be without health insurance for the rest of the year, because we are basically contract workers and only have benefits while on contract. From the reading I’ve done, this isn’t that big of a deal since health insurance inside the US won’t really benefit us while overseas anyway. However, there is one big problem with foregoing health insurance. If we don’t have health insurance the full year, then we’re going to be hit with the individual mandate penalty when we file our 2018 taxes. From talking to others in the FI community, it seems that many people are under the false impression that since the new tax law repealed the individual mandate, that they don’t have to worry about the penalty in 2018. Unfortunately, even though the mandate was repealed, this change doesn’t go into effect until 2019, so we are all still on the hook for 2018.

Avoiding the Insurance Mandate

Here are our three options that I have been pondering the past few weeks:

  1. Forget about health insurance, get travel insurance, and pay the $695 insurance mandate fee.
  2. Get health insurance either through the market place or through COBRA when we leave our jobs, probably paying $200-300/month minimum for insurance that we can’t even use while out of the country, and also pay for travel insurance.
  3. Try to get our incomes low enough (through contributions to pretax accounts) that we actually have an AGI that is below the tax filing threshold, which should be $12,000 (standard deduction amount) for single filers in 2018. This would make us exempt from paying the penalty.

Option 3 above seemed like the best choice to me. We decided a while ago that no matter what, we will be getting travel insurance for some peace of mind. But paying a fee for not having health insurance or paying for US health insurance that we won’t be able to use are options that just aren’t acceptable in my opinion. So while trying to lower our income below the threshold seemed like the best option, I wasn’t sure if the $12,000 mark was actually based on AGI or if it was calculated before traditional IRA contributions were subtracted from income. This led me to begin reading the tax law to determine how we can go without health insurance for the second half of the year without paying the penalty, or at least minimize the impact.

After a lot of reading on the IRS website with no clear, concise answers found (maybe I’m the only one that gets confused reading the IRS wording, but I doubt it…), I decided to print out a 1040 form as well as the “Shared Responsibility Payment” worksheet to write out some hypothetical scenarios for this year and determine the outcome of each. This turned out to be a very useful exercise that gave me a lot more insight into my taxes than I had prior. I learned quite a few things that will benefit Whitney and me in the future and also determined what our best course of action will be to avoid the mandate this year! Here are a few things I learned:

  • The penalty for not having health insurance is prorated based on how many months of the year you don’t have insurance. Since we will have health insurance from January – July but won’t have insurance for the last five months of the year, we would owe only $290 instead of the full $695.
  • As long as each of our individual AGIs are below $12,000 (the standard deduction amount) in 2018, we’re exempt from paying the penalty completely.
  • A side benefit of getting our AGI low is that we will be eligible for both the “Savers Credit” and the “Earned Income Credit.” Before this, I was unaware that an individual without children could qualify for the “Earned Income Credit.”
  • Since the “Savers Credit” is nonrefundable, we will get no benefit from it since our tax liability will already be $0 with an AGI below $12,000 for the year. We will benefit from the “Earned Income Credit” since it is refundable, which will mean an extra ~$240 on our refund when we file for 2018.

Here’s The Plan

Now at this point you might be wondering: what does all this mean and what will we be doing in 2018?? Basically, we will utilize our tax deferred accounts (401k, traditional IRA, and HSA) to get our AGI to exactly $12,000 for the year. With an AGI of $12,000, our tax liability will be completely eliminated by the new $12,000 standard deduction for 2018. This means that we will have a $0 federal tax liability for the year, a very small state tax liability, get about $240 refunded courtesy of the Earned Income Credit, and, best of all, be exempt from the individual mandate penalty!

I hope this is helpful for some of you all. Let me know if you have any questions and let me know in the comments below if you have had to pay the individual mandate penalty in the past!



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