Affordable Care Act (ACA) Tax Provisions

By now you should be aware that the Affordable Care Act (ACA) has become a law and is being implemented. Starting January 2014, you and your family must get insurance through the government marketplace.

If you are part of the 85% of America that is covered by your employer's health plan, the way you obtain insurance will likely not change.  If you are part of the other 15%, you will now be required to obtain mandatory health insurance though the government insurance marketplace.  However, regardless of how you obtain the mandatory health insurance, you will be affected by the ACA in one way or another.

Here I have highlighted several tax implications that will affect a majority of our clients. Some of these changes will be in effect for the 2013 tax filing. In the next few days, I will discuss some year-end and future tax planning considerations.

Net Investment Income Tax

A new Net Investment Income Tax goes into effect starting in 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts.

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child

Taxpayers should be aware that these threshold amounts are not indexed for inflation.

If you are an individual that is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.

Additional Medicare Tax

A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual’s filing status.

The threshold amounts are:
$250,000 for married taxpayers who file jointly
$125,000 for married taxpayers who file separately
$200,000 for all other taxpayers

An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. 

Small Business Health Care Tax Credit

This credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. For more specifics, visit the IRS website here.

Changes to Itemized Deductions for Medical Expenses

Beginning Jan. 1, 2013, you can claim deductions for medical expenses not covered by your health insurance when they reach 10 percent of your adjusted gross income. This change affects your 2013 tax return that you will file in 2014. There is a temporary exemption from Jan. 1, 2013, to Dec. 31, 2016, for individuals age 65 and older and their spouses. 

Health Insurance Premium Tax Credit

Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange. The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums. For more information on the credit, see the IRS questions and answers.

For more information regarding the Affordable Care Act, visit the IRS website, or schedule an appointment for a consultation.