The Latest Tax Implications of the Affordable Care Act Update (Obamacare)
Did you know the health care law actually created two new taxes to help pay for the cost of the ACA? The first of the two taxes is the Net Investment Income Tax (NIIT).
It is a new Medicare tax that applies to certain types of income received by the taxpayer.
Income that is subject to net investment income tax are the following:
- Interest
- Dividends
- Annuities
- Royalties
- Rental
- Capital Gains
Income that is not subject to the net investment income tax are:
- Wages
- Unemployment
- Income from an active business (S-Corp flow through)
- Social Security
- Alimony
- Tax-exempt interest
- Self-employment income
- IRA & Pension Distributions
The tax will apply to taxpayers with Income above the following thresholds (Adjusted Gross Income):
- Married Filing Joint $250,000
- Married Filing Separate $125,000
- Single $200,000
The tax is 3.8% applied to the lessor of the following:
– Taxpayers net investment income
– The amount of AGI above the threshold amount
Example: Tommy is a single individual with an adjusted gross income of $210,000 which included $20,000 of interest and $20,000 in dividends.
Tax is computed as follows:
Net investment income of $40,000
Adjusted gross income of $210,000
Threshold for singles: ($200,000)
Excess: $10,000
Lessor of A or B: $10,000
Taxable at 3.8%: $380
The second new tax is the Additional Medicare Tax
The Affordable Care Act also created a .9% tax called the Additional Medicare Tax, which is entirely separate from the 3.8% net investment income tax discussed earlier.
Taxpayers with wages and/or self-employment income above certain thresholds are subject to the additional tax.
The thresholds are the same as the net investment income tax.
- $250,000 for joint filings
- $125,000 for married separate filings
- $200,000 for singles
How is the tax calculated and paid?
Example:
Rudy is employed as a lawyer with Duey Cheatem and Howe. He is single and has the following annual earnings:
W-2 Wages $240,000
Interest $30,000
Total Income $270,000
Since Rudy’s wages exceed his threshold by $40,000 he is subject to the additional Medicare tax on this $40,000 or $360.00 ($40,000*.9%)
**Note he is also subject to the net investment income tax and will pay an additional $1,140 in NIIT. ($30,000*3.8%)
Now let’s address the individual medical insurance coverage mandate.
Effective January 1, 2014, individuals must maintain a minimum essential insurance coverage or pay a shared responsibility payment (penalty) on their tax return.
Here is what we think will happen at tax time since no specific guidance has been released yet:
During January 2015 when you are receiving all your other tax documents, your insurance company will send you a form for proof of insurance that you will need to provide your tax preparer. This form will show the type of coverage you have and the number of months during 2014 the policy was in place. If it was not in place the entire 12 months, then you are subject to the penalty for those months.
Without this proof of insurance information the penalty will be assessed.
Now, the time bomb no one is talking about.
Taxpayers who purchased health insurance policies through the exchange that was set up by the government could have surprises at tax time.
Part of the Affordable Care Act created a tax credit for lower income families and individuals depending on family size and geographic location. The lower the income the higher the credit. Sort of makes sense.
Here is the flaw:
During the application process one of the questions is “What do you think your 2014 income will be?” Based on the answer, it calculates your potential premium credit and asks if you want that applied to your monthly premium or wait and receive when you file your 2014 taxes.
What do you think has happened?
You think people figured out they could enter a lower amount for anticipated income and receive a larger credit? You got it! And of course they have applied it to their monthly premiums so they are paying a much lower amount than they should.
What happens next you ask?
At tax time we have to prepare a reconciliation of premium credits received already versus what they are entitled to, based on their actual income. If they have received too much in credits they are required to repay the excess credit. So taxpayers who usually get refunds will have balances due; these could be quite large, and as they are in the lower income bracket they will not have the money to pay them. What will the IRS do? No guidance on this one yet. Nobody is talking about it, but it is real.
Please contact us with your questions about this Affordable Care Act Tax Implications Update, or schedule your consultation by calling us at 317-549-3091.
We’re here to help you be prepared for next year and beyond for your personal and business tax needs.