The Affordable Care Act has a wide ranging list of tax effects, some of which apply to individuals, some to corporations, some intended to provide incentives for individuals or businesses to get insurance, some to provide funding which helps keep other parts of the law up and running.
Before you get worried, though, or dive into any of the details, here’s the short story:
For most people — who have insurance through their employers or Medicare — and who have incomes below $200,000/$250,000 — there really aren’t any direct effects. The new taxes won’t apply, the mandate’s penalty won’t apply, and the premium subsidies won’t apply.
Here are a few of the provisions which are affecting people’s taxes in 2014 and beyond:
0.9% Medicare Surtax
There was already a 2.9% Medicare payroll tax. Half paid by the employer and half by the employee. And unlike Social Security taxes which only applied to a limited amount of your earned income, Medicare taxes apply to 100% of your earned (wages, compensation and self-employment income) income.
The ACA added a “surtax” — an additional tax on top of the existing Medicare tax. This 0.9% additional layer of taxes applies to earned income (wages, compensation and self-employment income) to the extent that such income exceeds $200,000 for individuals or $250,000 for married (filing jointly). This additional 0.9% is paid by the employee, not the employer. This tax has been in effect already (in 2013) and continues permanently forward.
Your employer will automatically withhold that additional 0.9% on all income above $200,000 without regard to your marital status. If you are married and your spouse has no earnings, that means that withholding is going to apply at a lower threshold than where you really owe taxes, but that’ll be factored into your final taxes and potential refund. If you work two jobs, neither of which earns above the threshold, but combined you exceed it, again, you’ll make up for that when you file your taxes.
Individuals will calculate any additional Medicare tax liability using form 8959 and it will be reported (and paid for) via the form1040.
3.8% Tax on Net Investment Income
Similar to the Medicare Surtax, this is a revenue generating tax which is an analog for Medicare taxes, but since Medicare taxes only applies to earned income, a lot of income was excluded — such as investment income. This tax is a means for adding a Medicare-like tax to layer onto income previously excluded from Medicare taxes, and like the Medicare surtax, it only applies to the extent that combined earned and unearned income exceeds the $200,000/$250,000 threshold. This tax has been in effect already (in 2013) and continues permanently forward.
This tax has erroneously been called a “tax on the sale of your home”. It can, in fact, act like one — if you have any highly appreciated asset that you sell — which may include a home which has grown in value over the years — such capital gains may push you into the income range where you are affected by this tax. Most individuals don’t earn enough for this tax to hit them, but rare or once-in-a-lifetime events — such as the sale of a family home which was purchased decades before — may cause people who otherwise wouldn’t run into this tax to do so. Nevertheless, it affects only very few people, and further, the sale of a primary home already has exclusions of $250,000 or $500,000 of capital gains, so even then, it affects the profits from the sales of very few, relatively expensive homes.
Where it’s likely to hit high-income earners most of the time is if they own stocks and mutual funds in taxable accounts and their combined family earned income is in the $200,000-$250,000 range — if their earned income already puts them near or above that threshold, then any capital gains from the sale of stocks, dividends and interest from stocks and bonds, and any distributions of either from mutual funds may all get hit with this additional layer of taxes which previously would not have applied.
For the highest income folks, combined with the new 20% bracket for capital gains and qualified dividends (part of the American Taxpayer Relief Act which also took effect in 2013), this leads to potential current levels of federal taxation on investment income which previously would have been taxed at 15% to be taxed at 23.8% (plus state income taxes – which, in CA, can easily exceed 9 or 10% as well).
Employer Reporting of Insurance on W-2 (not a tax)
Starting with your 2013 W-2, your employer had to start reporting the value of employer-provided health insurance. This hasn’t increased your taxes, or changed the taxes or the exemptions that your employer had as a result of this. It’s purely informational. When your employer provides you insurance, most of the time, you pay a small portion of the cost of that insurance and the employer picks up the tab for the rest. The employer gets a tax deduction for providing that for you, and unlike other income, you don’t pay any income taxes on the value that your employer paid for your insurance. But now you may actually find out exactly how much your employer has been paying on your behalf. This is a good thing — you should know how much your insurance is actually costing, even if you don’t directly foot that bill. Many people are shocked by how expensive this is.
This reporting on the W-2 also sets the stage for 2018 when there will be a tax (paid by employers) on certain very expensive employer-paid health insurance, the so-called “Cadillac” high-end Premium Health Insurance plans.
The Individual Mandate (hitting for the first time now, for 2014 taxes)
This is one of the provisions that was challenged (and lost) at the Supreme Court (where the court decided that regardless of what it’s actually called in the law, it’s a “tax”). It’s officially called the “individual shared responsibility payment”. Whether you call it a tax, a payment, a penalty, a fee, it’s money you have to pay if you don’t have qualifying health insurance, and it’s intent, clearly, is to get people to buy health insurance one way or another (and to a much lesser extent, to pay for the costs of providing that insurance and coverage to everyone).
Each individual must have “minimum essential coverage” (which includes all marketplace insurance (the “exchanges”), most private major medical plans, Medicare, medicaid and CHIP, and most employer-based coverage, as well as many “grandfathered” health plans which wouldn’t be compliant if they were started now). Most short-term plans and other non-compliant plans purchased outside of the open-enrollment period do not comply with the ACA individual mandate.
You may be exempt from the individual mandate under certain circumstances (low income, incarceration, religious, indian tribes, short gap of less than three months, hardship, a few other things). Most individuals — both adults and children — in the US are subject to the mandate. If you are claiming an exemption from the individual mandate, you file a form 8965 with your 1040.
Almost everyone with employer-provided coverage is already in compliance, as are everyone on Medicare. Those two things cover the vast majority of the individuals in the US, so most people won’t actually be affected by this.
The actual tax for 2014 is whichever is higher – either (1% of your household income) or ($95 per adult and $47.50 per uninsured dependent under 18 up to a total of $285/family). This will be owed for the first time on many people’s income taxes for 2014, which are due this coming April, 2015.
And for the uninsured who should have gotten coverage through the exchanges open-enrollment period — that period ended mid Feb, so this is going to be a surprise to some people just now preparing their taxes who hadn’t gotten their insurance already.
For tax year 2015, the penalty goes up a lot — to whichever is higher – either (2% of your household income) or ($325 per adult and $162.50 per child under 18 with a family maximum of $975).
For tax year 2016 and beyond, it’s even higher still — 2.5% of income or $695/person, and from there on the fixed amounts (per person) are adjusted up with inflation).
The Advanced Premium Tax Credit
This is not actually a tax, but it’s going to hit a lot of people as if it were one. When an individual applies for health insurance on one of the exchanges, there are very substantial subsidies made available to that individual based on income. So when applying for insurance, one necessarily had to estimate one’s expected income for the year. And then the insurance premium was computed, and a subsidy which, effectively, lowered the amount that was actually paid by that individual, was also computed.
That subsidy was based on the income estimate. If that income estimate was wrong — and this is where it’s going to get ugly — if you underestimated your income — than the subsidy was wrong. And you’ll have to make it right when you file your taxes.
So if you underestimated your income, the subsidy that applied to your premium payments was too high. And when you do your taxes, you’ll recompute your subsidy with your actual income — which may lead to a smaller subsidy which should have been applied. And you’ll have to make up the difference out of pocket.
There are going to be some people who overestimated their income and got subsidies smaller than they should have. They’ll get refunds. No problem.
But the people who underestimated their income are going to owe the government money – they’re going to have to pay back however much their estimated subsidy exceeded whatever their real subsidy was.
Unfortunately, the same people who are likely to run into this are people who may not have the free cash available (savings?) to pay this amount owed. And because it’s going to be owed when they file their taxes, it’s going to look like a tax even though it really isn’t one.
Nevertheless, the structure of the subsidies themselves – like any “means-tested” program — even if it isn’t actually a tax, it creates economic incentives and costs which behaves precisely like a high marginal tax, and in this case, like a high marginal tax which only affects low-moderate incomes. (The subsidy applies to families making up to 4x the “federal poverty level”).
Other ACA taxes
Most of the rest of the ACA taxes and effects don’t directly affect individuals. There are provisions such as the “small business mandate” which is set to go into effect starting in 2015 and applies to businesses which employ more than 50 full time employees. There are taxes on medical device manufacturers (2.3%, started in 2014), taxes on indoor tanning services (!), taxes on brand name drugs, health insurers, a limit on annual compensation for health insurance executives, etc. etc.
The Bottom Line
The bottom line is that for most people — folks who have insurance through their employers, or Medicare — who have incomes below $200,000/$250,000 — there won’t be any direct tax impact on your 2014 taxes as a result of ObamaCare.
For the high-income folks, work with your tax and investment advisors to minimize the impact of things like the Net Investment Income Tax.
And look at your W-2 to see how much your health insurance actually cost your employer on your behalf. It may be eye-opening.
For everyone else — those who either had no insurance or who got it through the exchanges (or, even less likely, directly purchased insurance which wasn’t compliant with the mandate), get ready for a whole new experience as the individual mandate and the extremely complex subsidy structure kick in.
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