In this March 28, 2012 photo, supporters of health care reform rally in front of the Supreme Court in Washington. The Supreme Court upheld the law as
In this March 28, 2012 photo, supporters of health care reform rally in front of the Supreme Court in Washington. The Supreme Court upheld the law as constitutional. Congressional budget analysts are now estimating that nearly 6 million Americans, most of them in the middle class, will have to pay a tax penalty for not getting health insurance once Obama's health care law is fully in place. Starting in 2014, the new health care law requires virtually every legal resident of the U.S. to carry health insurance, or face a tax penalty. (Charles Dharapak/AP Photo/File)

The clock is ticking for millions of uninsured Americans who are grappling with a critical decision: Should they comply with the new federal mandate to purchase health insurance starting Jan. 1, 2014, or pay the tax instead?

[READ: 5 Ways Health Care Reform Will Impact Your Finances]

The Affordable Care Act requires most people who can afford health insurance to buy coverage -- a provision known as the individual mandate -- or pay a penalty based on their taxable annual income and household size.

"People need to understand that taxes and health care are now connected," said Meg Sutton, senior advisor for tax and health care services at H&R Block. "Every individual and family should consider the personal impact of the Affordable Care Act no matter what decision they make about health insurance."

[READ: How Obamacare Will Affect Health Insurance Rates by Age Group]

About 6 million Americans will choose to pay a penalty each year instead of purchasing health insurance, according to estimates from the Congressional Budget Office and the Joint Committee on Taxation.


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Marilyn M. Niwao of the National Society of Accountants advises clients to consider their health risks (family history, lifestyle, health status) and financial risks (personal wealth, number of dependents) when determining whether to forego coverage. "It's an important decision that should be made carefully," she said.

Here's what you need to know about the tax penalty and how it works:

Avoiding the penalty

To avoid paying the tax, individuals must purchase health insurance that includes a minimum of 10 essential health benefits — such as hospitalization, maternity care, prescription drugs and more — and covers at least 60 percent of their medical costs. People who have coverage through their employers or are enrolled in government-subsidized health plans such as Medicare, Medicaid, the Children's Health Insurance Program or TRICARE don't need to worry about the tax.

Beginning October 1, millions of uninsured Americans with low and moderate incomes will be eligible for tax credits (to help pay premium costs) and government subsidies (to help pay out-of-pocket expenses) when they purchase health insurance in the new online marketplaces created by the law. In addition, millions of the nation's poorest residents will be newly eligible for Medicaid in the states that have agreed to expand the federal-state health program for people with low incomes, as proposed by the law.

Some exemptions apply

Uninsured individuals with incomes so low they aren't required to file a federal tax return or who can't find coverage that costs less than 8 percent of their income do not face a fine . Others exempt include members of Indian tribes, people whose religion objects to health insurance, undocumented immigrants, Americans living abroad, members of a health care sharing ministry and people in prison.

Flat fee versus percentage of income

The penalty for going without health insurance involves a flat fee or a percentage of taxable income, depending on which is greater. In 2014 the tax begins at $95 per adult and $47.50 per child (up to $285 for a family) or 1 percent of annual income, whichever is greater.

In 2015, the penalty goes to $325 per adult and $162.50 per child (up to $975 for a family) or 2 percent of annual income, whichever is greater. By 2016, the tax is $695 per adult and $347.50 per child (up to $2,085 for a family) or 2.5 percent of annual income, whichever is greater. The tax will be adjusted for inflation beginning 2017.

Experts recommend seeking professional advice because the law comes with many tax complexities, including the penalty formula. The tax is based on the difference between your annual income and the "filing threshold" which refers to the amount you can earn tax free in a year (about $10,000 for an individual and $20,000 for a family, in 2013).

For example, an uninsured individual with an annual income of $40,000 would pay 1 percent of the difference between $40,000 and the "filing threshold" ($10,000), leaving a total of $30,000 in taxable income. One percent of $30,000 is $300. Since $300 is greater than $95 (the flat fee for an adult), this person would pay a $300 penalty in 2014.

"The amount of the potential tax penalty can be pretty surprising to people who thought it was going to be $95 and then discover the tax could be $1,200 or more because of their personal circumstances. It can really add up if you have a large family and many dependents," said Sutton of H&R Block, which offers a "tax and health care review" service to help clients determine their potential tax penalty and eligibility for tax credits and subsidies available in the new health insurance marketplaces.

Penalty prorated monthly

You won't need to pay the tax if you were uninsured for less than three months of the year. But after that, the tax applies to each month within a calendar year that you did not have coverage for yourself or a member of your household. Insurers will provide documentation to prove you had insurance.

Smaller tax refunds

The penalty will be assessed when filing your income tax return and deducted from any potential refund. "Any reduction in the refund amount is eye opening because many people plan for that refund every year," said Sutton .

No criminal penalties

At this point, individuals who do not comply with the federal mandate to carry health insurance face no criminal penalties or threat of liens and seizures by the Internal Revenue Services.

Weigh the risks carefully

Choosing to forego health insurance means you're responsible for paying all of your health care costs , from visits to the doctor's office for vaccinations, health screenings and check-ups to ambulance rides and emergency department visits for life-threatening situations. You also won't have any protection against astronomical medical bills — such as a $30,000 bill for a three-day hospital stay — that can sometimes lead to personal bankruptcy.

"A serious illness or sudden accident could lead to financial disaster, no matter what your age," said Niwao.