In March 2010, President Obama
signed the Patient Protection and Affordable Care Act (the “Affordable Care
Act”) into law. We suggest that you take some time to review the provisions and see how it can effect your taxes for 2014 and beyond.
The Affordable Care Act – an Overview
Under the Affordable Care Act,
all individuals will be required to have health insurance. There will be
incentives for those who enroll and penalties for those who do not. While the
majority of US citizens and legal residents will be subject to the penalties,
certain groups will be exempt such as undocumented immigrants, incarcerated
individuals, American Indians and members of certain faiths. Large employers
(those with 50 or more full-time employees) will be required to offer coverage
to employees and will be penalized for noncompliance. Small employers who
provide coverage for their employees may qualify for tax credits in 2014 and
2015 and will pay no penalties for failure to participate.
As a result of this
legislation, Health Insurance “Marketplaces” (formerly known as exchanges) will
be established to assist low and moderate-income individuals, families and
small businesses in purchasing health insurance plans that are eligible to
receive federal subsidies.
Under the ACA, several aspects
of health insurance plans will be regulated. All health insurance plans must
have no lifetime or annual limits, no potential rescission of coverage, no
pre-existing conditions exclusions, no excessive waiting periods for
eligibility to become covered by the plan and no cost sharing for preventive
care. The insurance market must limit deductibles for certain plans and new
insurance plans must cover your children until they reach age 26 while older
plans must only cover children who cannot get insurance from their place of
employment until they are 26.
The plan provider must provide
a summary of benefits and coverage to participants. Plan enrollees must be
allowed to select any available participating primary care provider. Premiums
can be based only on limited factors, and there must be an effective process
for appeals from claims determinations.
Each of these requirements is
designed to improve the experience of the insured individuals and to ensure
greater coverage than was previously provided by health insurance companies.
As you can see, the impact of
this legislation is far-reaching. We are providing this information so that you
are informed. Our goal is to make you aware of these provisions in order that
we may discuss them in more detail and determine exactly how they may apply to
your particular situation. If you have any questions about the Affordable Care
Act or any other tax matter, please give us a call.
Tax Credits to
Offset Insurance Premiums
A Kaiser Family Foundation
study predicted that nearly half of all Americans who buy their own health
insurance through the Affordable Care Act’s Marketplaces will be eligible for
tax credits or subsidies. Researchers estimated tax credits averaging $2,672 for
individuals will cover approximately 32% of the insurance cost, and tax credits
averaging $5,548 will cover 66% of the cost for families.
The federal tax credits will
be available for people who have incomes from 100% up to 400% of the poverty
level (between $11,500 and $46,000 for a single person, and about $24,000 to
$94,000 per year for a family of four in 2014). The tax credit will be
refundable so taxpayers who have little or no income tax liability can still
benefit, or the credit can be paid in advance to the taxpayer’s insurance company
to help cover the cost of premiums.
The amount of the tax credit
used in the study is based on a benchmark premium, which is the cost of the
second-lowest-cost silver plan in the area where a person lives. The tax credit
equals that benchmark premium minus what the individual is expected to pay
based on their family income (which is calculated on a sliding scale from 2% to
9.5% of income). Researchers cautioned that it is difficult to determine
exactly what Americans will be paying for coverage through the Marketplace
because subsidy amounts will be based on factors including age, income, place
of residence and type of policy chosen.
IRS Releases Health Care Disclosure Rules
The IRS has issued the final
regulations explaining how it will release tax return information to the
Department of Health and Human Services, and in turn, the Marketplace and state
agencies, to determine a taxpayer’s eligibility for various health insurance
programs and credits. The IRS noted Section 6103(l)(21) of the tax code allows
the disclosure of income, filing status, number of dependents and taxpayer identity
to determine eligibility in Medicaid, CHIP or BHP programs. Income verification
will also be required to determine eligibility and affordability in the
insurance exchanges, or Marketplaces, as they are now known.
The same tax code section also
authorizes the disclosure of other information that would indicate if an
individual is eligible for the premium tax credit or any cost-sharing
reductions. In addition to income, filing status and identity, Social Security
benefits were also added to the list of information that can be disclosed to
enable insurance exchanges to determine a taxpayer’s modified adjusted gross
income. Providing the amount of Social Security benefits will also help the
exchanges determine if a taxpayer is eligible for the premium tax credit or any
cost-sharing reductions.
Nothing in the ACA allows the
IRS to access an individual’s health information, including information about
the individual’s health status or health services received.
Watch Out for These Two New Taxes!
Two new taxes were included in
the Affordable Care Act enacted in 2010, but didn’t go into effect until
2013: the 3.8% tax on net investment
income and the 0.9% Medicare surtax on earned income. Both new taxes are
designated as Medicare taxes, but none of the funds generated by these
provisions are earmarked for Medicare or health care purposes. While the type
of income subject to these new taxes is different, there is some overlap in the
definition of taxpayers subject to these new taxes.
The 3.8% Tax on Net Investment Income
The 3.8% surtax will be imposed on the lesser of your net investment income for
the tax year, or the amount by which your modified adjusted gross income (MAGI)
exceeds the “threshold amount” for the year. The threshold for married filing
jointly is $250,000, $125,000 if you are married filing separately, and
$200,000 for everyone else.
Although the IRS issued more
than 100 pages of regulations to define “net investment income,” the term
basically includes interest, dividends, annuities, rents, royalties and capital
gains. Interest on tax-exempt bonds and distributions from qualified retirement
plans are not included, nor is any gain excludable from income on the sale of
your primary residence.
Planning related to this tax
focuses on reducing net investment income. Rebalancing portfolios, maximizing
deductions and/or non-income producing real estate may be options. If gain on
the sale of property will be subject to the tax, it might be worthwhile to
consider an installment sale or a like-kind, tax-deferred exchange of
investment real estate instead of a sale.
Bottom line: Give us a call
now so we can examine possible tax strategies before the year is over. Although
your investment choices and long-term objectives should come first, tax
implications are also a consideration.
The 0.9% Medicare Surtax on Earned Income
Unlike the 3.8% tax on net
investment income, this tax applies to wages and self-employment income. The
income thresholds are the same as the tax on net investment income above:
$250,000 for couples filing jointly, $125,000 for those married filing
separately and $200,000 for other filers. The surtax applies only to the
employee’s portion of the Medicare tax. There is no increase to the
employer-paid portion, but employers are required to withhold the surtax once
an employee’s wages exceed $200,000 in a calendar year.
Caution: If
filing jointly, each spouse could earn less than the $200,000 threshold and
have no extra withholding on their wages during the year, however, if their
combined wages exceed the $250,000 threshold on their tax return, they will pay
the surtax owed at tax time. On the other hand, if one spouse’s wages are over
$200,000 and the employer withholds the additional tax, but the other spouse
earns less than $50,000, then any extra surtax withheld would be credited on
their tax return.
Summary of the Affordable Care Act Provisions Effective
January 1, 2014
-
Most Americans who can
afford coverage will be required to purchase health insurance or pay a tax
penalty that starts at $95 ($285 per family) or up to 1% of income, whichever
is greater.
-
Up to 17 million
Americans under age 65 could be eligible for Medicaid. States that choose to
expand their program will receive federal financial aid for the increased
payment rates.
-
Depending on which state
you live in, you will have access to an Exchange administered by your state.
Health insurance exchanges will be known as “Marketplaces” where consumers can
compare and purchase health insurance. Four different options, called “Metal
Plans” (Bronze, Silver, Gold, and Platinum), will be offered through these
Marketplaces. Subsidies and tax credits will be available based on age, income,
and geographic location.
- Effective in 2014, the
law makes it illegal for any health insurance plan to use pre-existing
conditions to exclude, limit or set unrealistic premium rates on coverage for
adults. The requirement to cover children under age 19 for pre-existing
conditions began in 2010.
-
The provision that
required employers with 50 or more workers to provide health care coverage or
face fines has been postponed until 2015.
IRS’ Affordable Care Act Tax Tips
Confused about the Affordable
Care Act? Have questions and need more information? The IRS launched the Affordable Care Act Tax Provisions website at IRS.gov/aca to
educate individuals and businesses on how the health care law may affect them.
The new home page has three sections that explain the tax benefits and
responsibilities for individuals, families, employers, and other organizations,
with links and information for each group.
Topics include:
- Tax credits for individuals
- New benefits and responsibilities for employers
- Tax provisions for
insurers, tax-exempt organizations and certain other business types.
For more information, contact Elite Bookkeeping & Tax Services at (800) 416-3820 or (775) 884-6188 Address: 123 West Nye Lane, Suite 103, Carson City, NV 89706. Visit our website at
www.elitebookkeeping.biz
