The federal government and the State of California have different approaches to uninsured taxpayers, which can cause confusion about health insurance. The federal penalty for not having health insurance has been lowered to $0, but California has its own health coverage mandate and can also have a health coverage tax penalty.
Knowing the difference can help prevent California taxpayers from being hit with an unplanned shortfall when filing their state taxes. Look for an expert (similar to a CDTFA tax auditor) who will audit your account and help you solve matters.
Federal IRS Penalty: $0 at the moment
The Affordable Care Act (ACA) had a previous mandate to have a minimum amount of health care coverage or to pay an Individual Shared Responsibility Payment (SRP). The federal payment, however, was eliminated entirely by the Tax Cuts and Jobs Act for months that started after Dec. 31, 2018.
For tax years 2019 and onwards:
- There is no federal uninsured penalty.
- Form 8965 is filed to claim a federal coverage exemption, unless you are claiming it.
- There is no new federal SRP for those years when a coverage gap occurs.
But the IRS may still be trying to collect older unpaid federal SRPs (from before 2019).
California FTB Penalty: Importance of Coverage
The Individual Shared Responsibility requirement has been implemented in California starting in 2020. Most people living in California are required to have insurance that meets the requirements, be eligible for an exemption, or be liable to pay a penalty via their state income tax return.
The penalty for tax year 2025 is normally the greater of:
- Flat fee: $950 for each uninsured adult and $475 for each dependent child.
- Income-based amount: 2.5% of household gross income over the amount required for California filing.
A typical household of four people (two adults, 2 children) may be liable to pay a flat rate of $2,850. The higher of the 2 amounts, based on income, is the amount used.
The actual calculation will vary based on the number of household members, months without coverage, income, filing status, and exemptions. California offers Form FTB 3853 to calculate the amount of the penalty and any applicable exemptions. Talk to a professional (like sales tax audit lawyers) who will understand your issues and find the right solutions.
Hardship and Other Exemptions
The penalty is not for all uninsured California taxpayers. Possible exemptions include:
- Income that is below the California tax filing threshold
- Unaffordable health coverage
- Three consecutive months or less coverage gap
- Some noncitizens who are not legally in this country
- Some people outside of California
- Incarceration
- Some circumstances of birth, adoption, or death
- Religious exemption or qualifying hardship
Some exemptions are available on the California return, and some are available through Covered California and are considered hardship exemptions.
Tips to Avoid an Unexpected Penalty
- Keep coverage records: Save Forms 1095-A, 1095-B, 1095-C, insurance statements, and enrollment records.
- Coverage is by month, so a taxpayer might be covered for some months, but not others.
- Check affordability: Do not assume that a costly plan is automatically exempt from an exemption.
- Fill out Form FTB 3853: Used to help determine California’s penalties and exemptions.
- Check your entire household: Dependents, spouses, and domestic partners can be a factor.
- Review the tax year: Both the penalty amounts and thresholds are subject to change from year to year, depending on the tax year.
That’s the crux of the difference: the federal individual mandate requires no payment for failure to obtain insurance coverage, but there may be a state-level penalty in California. Checking coverage/exemptions prior to filing can avoid a needless California tax liability.
