As implementation for the Affordable Care Act (“ACA” or “Obamacare”) has finally begun, taxpayers at all levels will notice certain changes in taxes they pay, the way income is reported and health-related deductions. This Executive Summary covers some of the provisions with the broadest potential impact.
CHANGE TO W-2 FORMS
Beginning in 2014, W-2 forms must include a new section reporting the value of employer-sponsored health plans. Based on this information, the IRS may determine that you are eligible for a tax credit or liable for penalties (see below). Although the value of your plan will be reported on your W-2, it is not treated as income and you don’t need to report it as such.
TAX CREDITS FOR INSURANCE
People with AGI of 133% – 400% of the poverty limit may be eligible for tax credits to purchase health insurance. The thresholds for this are $14,404 – $43,320 for individuals and $29,327 – $88,200 for families.
- Credits are refundable.
- Credits cannot be for an amount greater than the cost of a premium for a qualified plan.
- If insurance is purchased through an exchange, the credit can be applied up front and deducted from the monthly premium cost.
Penalties will be assessed when qualified insurance is not purchased as required. These apply as follows:
- Employers with more than 50 full time equivalent employees will pay $2,000 per year per employee if they do not provide qualified health insurance plans. Penalties have been suspended for tax year 2013, but are expected to be implemented in 2014.
- Individuals whose employers do not provide health insurance may be subject to a penalty beginning in 2014. This starts at 1% of AGI or $95, whichever is greater and rises by 2016 to 2.5% or $695.
Beginning in 2018, high cost tax plans (annual cost of $10,200 for individuals or $27,500 for families) will be subject to a 40% excise tax. The tax will be charged to the insurer; however, it likely will ultimately lead to costs being passed on to the consumer or plans being phased out.
ADDITIONAL MEDICARE TAXES
Two additional Medicare taxes will go into effect for all high income taxpayers beginning with tax year 2013. The income threshold for these new taxes is $250,000 for married filing jointly, $125,000 for married filing separately and $200,000 for all others. These thresholds apply to total AGI in both cases.
- 0.9% will apply to wages and self-employment income that exceeds the threshold. Employers are responsible for withholding this.
- 3.8% will apply to net investment income that exceeds the threshold, including interest, dividends, capital gains, rents and royalties.
ITEMIZED DEDUCTION FOR MEDICAL EXPENSES
The threshold for claiming an itemized deduction for out-of-pocket medical expenses has increased from 7.5% of AGI to 10% of AGI beginning with tax year 2013. Taxpayers older than 65 will not be subject to this increase until 2016.
FLEXIBLE SPENDING ACCOUNT (FSA) CAP
Beginning with tax year 2013 there is a cap of $2,500 for pre-tax FSA contributions. Anything above this cap becomes part of taxable income. Under prior law, employers were allowed to set limits as high as $5,000.
THE BOTTOM LINE
The ACA will bring inevitable changes for most taxpayers, both business and individual. Here’s a summary of what we believe to be the most critical points at this early stage of implementation:
- Ensure compliance with new W-2 regulations.
- Provide ACA-qualified plans to employees (applies to businesses with more than 50 full time equivalent employees)
- Prepare to withhold additional .9% Medicare tax on higher income employees.
- Withhold all applicable taxes on FSA contributions higher than $2,500.
- Purchase ACA-qualified health plan if not covered by employer.
- Explore whether health insurance premiums can be offset by tax credits.
- Monitor AGI – especially if there is some investment income – to avoid additionalMedicare taxes.
- Plan out medical expenses to ensure meeting the deduction threshold.
This Executive Summary was created from presentations given by the authors for various professional audiences. It is intended to provide a broad overview to recent changes in the tax code. No warranty, express or implied, is given as to the accuracy or applicability of any information provided here.