The media coverage on the Affordable Care Act was, generally, political and failed to explain the details of how the law will impact individuals. The intent of this article is to explain how the Affordable Care Act will impact your pocketbook in 2013, when the healthcare taxes kick in, and in 2014, when the mandatory insurance requirement becomes effective. The following are the details for 2013.
Increased Hospital Insurance Tax—Affected: Higher income working families
Part of the taxes withheld on employees’ wages covers the Hospital Insurance (HI) portion of their contribution to Medicare; self-employed individuals pay the HI tax as part of the self-employment tax that is included in their tax return. The HI tax rate—currently at 1.45% for employees and 2.9% for self-employed individuals—will increase by 0.9% on individual taxpayer earnings in excess of $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately, and $200,000 for all other taxpayers.
For married taxpayers, this additional tax is based upon their joint income. However, if both spouses work, their employers will only base the withholding on the employee’s individual earnings. Thus, married taxpayers who both work may find themselves under-withheld on HI taxes. Therefore, they will be required to pay the uncollected HI tax on their income tax return when it is filed. They may need to take steps to increase income tax withholding, or pay or increase estimated taxes in order to compensate.
Surtax on Unearned Income—Affected: Higher income families
A new surtax called the Unearned Income Medicare Contribution Tax is imposed on the unearned income of individuals, estates and trusts. For individuals, the surtax is 3.8% of the lesser of:
- The taxpayer’s net investment income, or
- The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others).
“Net” investment income is investment income reduced by allowable investment expenses. Investment income includes income from interest, dividends, annuities, royalties, rents (other than those derived from a trade or business), capital gains (other than those derived from a trade or business), trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to the trading of financial instruments or commodities. For surtax purposes, modified adjusted gross income does not include excluded items, such as, interest on tax-exempt bonds, veterans’ benefits, and excluded gains from the sale of a principal residence. To avoid or minimize this new tax, higher income taxpayers may wish to include more non-taxable investments as a portion of their portfolios. Homeowners should be aware that the gain from the sale of their primary home in excess of the homeowner’s gain exclusion or gain from selling a second home is treated as investment income and would be subject to this new tax.
Deductible Medical Expenses Threshold Increases—Affected: All taxpayers (except seniors for now), who itemize their medical expenses
Beginning 2013, for taxpayers under the age of 65, the AGI threshold percentage for claiming medical expenses on a taxpayer’s Schedule A will increase from 7.5% to 10%, which is the same as the current threshold percentage for alternative minimum tax (AMT) purposes. Individuals (and their spouses) age 65 and older will continue to use the 7.5% rate through 2016. Thus, it may be appropriate to pay outstanding medical bills or pre-pay such things as orthodontics for a child before the AGI threshold increases to 10%. In addition, if you are considering elective deductible medical procedures, such as laser eye surgery, it may be beneficial to have the procedure and pay for it in 2012.
Employer Health FLEX-Spending Plan Contributions Limited—Affected: All taxpayers participating in health FSAs
For a health flexible spending account to be a qualified benefit under a cafeteria plan, the maximum amount available for the reimbursement of incurred medical expenses of an employee, the employee’s dependents, and any other eligible beneficiaries cannot exceed $2,500. Some taxpayers or employers may wish to consider establishing Health Savings Accounts or Medical Expense Reimbursement Plans to write off newly-disallowed medical expenses, as a result of the increased medical deduction AGI limitation and the reduced benefits from the employer’s health flex-spending plans.
Mandatory Health Coverage—Affected: Lower income individuals and families not exempt from the requirement
Beginning in 2014, all U.S. citizens and legal residents, except for those who are exempt from the requirement, will have to maintain minimum essential health insurance coverage or pay a penalty. Generally, individuals, who are covered by health insurance through their employers, will have met the mandate.
Exemptions include low income individuals and families (for whom the cost of minimum required coverage exceeds 8% of their annual income); those not required to file a federal tax return because their income is below the filing threshold; those who are unlawfully present in the United States; incarcerated individuals; Indian tribal members; religious objectors, and/or individuals with hardship waivers. Minimum essential coverage generally includes:
- Private market plans;
- Government sponsored programs (e.g., Medicare, Medicaid, Veterans Administration, etc.);
- Eligible employer-sponsored plans, and/or
- American Health Exchange “bronze” coverage (pays 60% of covered expenses).
By 2014, each state must establish an Exchange to help individuals and small employers obtain coverage. These plans must provide essential health benefits, limit cost sharing and specify the percentage paid the insurer. Plans in the individual and small group markets use a metallic designation for the benefits provided: Bronze 60%, Silver 70%, Gold 80% or Platinum 90%. The law also provides a premium assistance credit for low-income families, whose household income is at least 100%, but not more than 400% of the federal poverty line, and who do not receive health insurance under an employer plan, Medicaid, or other acceptable coverage.
The penalty for individuals required to purchase insurance, who fail to do so, will be phased in beginning in 2014 and will be fully implemented in 2016. The monthly penalty amounts are based upon a complex formula and are equal to the greater of an inflation-adjusted flat dollar amount, which is $95 for 2014 and increases to $625 in 2016, or 1% of income increasing to 2.5% in 2016. However, in either case, the annual family penalty cannot exceed 300% of the individual maximum penalty for the year ($1,875 in 2016). The penalty will be included on an individual’s income tax return each year in which the individual has not complied with the insurance coverage requirement. While the IRS is responsible for collecting the penalty, the IRS is prohibited from jailing taxpayers or seizing their property, if they fail to pay it.
Bottom Line
The foregoing is a very brief overview of the health care provisions for individuals. However, the health care provisions are not yet cast in stone. In fact, this is a hot political issue, so be sure to watch for further developments. If you have questions or would like to schedule a tax planning appointment, please call your Tax Consultant.
Disclosures:
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
