Obamacare tax changes
For 2013 taxes:
• Medical expense deduction. The threshold for deducting medical expenses increased from 7.5 percent of adjusted gross income to 10 percent. That does not apply to those over 60: Their threshold is still 7.5 percent.
• Medicare surtax. High-income taxpayers — $250,000 in adjusted gross income for a married couple — must pay an additional 3.8 percent on net investment income and 0.9 percent on compensation. A Roth IRA can help reduce income to avoid or reduce the tax.
• Health savings accounts. Used with a high-deductible policy, HSAs can offset income by putting aside money tax-free specifically for medical expenses like co-pays and deductibles. The amount that can be set aside for 2013 is $3,250 for an individual and $6,450 for a family, with an additional $1,000 for those 55 and older.
• Flexible spending accounts. FSAs are limited in 2013 to $2,500.
For 2014 taxes:
• Tax credits for buying policies on healthcare exchanges. Credits are available for individuals and families making under 400 percent of the poverty level based on modified adjusted gross income ($45,960 for an individual and $94,200 for a family of four in 2013). If you have a higher modified AGI in 2014, you will have to pay back some or all of the subsidy on your 2015 taxes. If you drop employer-offered coverage, that plan must be unaffordable or inadequate for you to qualify for a subsidy.
• Penalties for the uninsured. If you have no insurance coverage by March 31, you will pay a penalty on next year’s taxes: $95 per adult (over 18) and $47.50 per dependent child up to age 18, not to exceed 1 percent of your taxable income. The penalty climbs to $325 per adult, or up to 2 percent of income, in 2015 and $695 per adult and $347 per child, or 2.5 percent of income, in 2016.
• Exemptions from the penalty. The Kaiser Family Foundation says people can be exempt from the insurance mandate if they cannot afford coverage because the cost of premiums exceeds 8 percent of their household income or if their household incomes are below the threshold for filing a tax return. People with certain hardships are also exempt, including those who would have been eligible for Medicaid but don’t receive it because their state did not expand the system (such as Texas). Other exempt groups include prisoners, American Indians eligible for care through the Indian Health Service, illegal immigrants, people with religious objections to having insurance coverage and individuals who experience a coverage gap of less than three consecutive months.
• Filing for an exemption. The Kaiser Family Foundation says that if you are seeking an exemption based on incarceration or membership in an Indian tribe or a healthcare sharing ministry, you can apply through the health insurance exchanges or make a claim when you file your taxes. If you are claiming economic hardship or a religious exemption, you must get an exemption certificate from the exchange. If you are claiming that coverage is unaffordable, that you are in the country without proper documentation or that you had a coverage gap of less than three months, make the claim when you file your 2014 taxes in 2015.
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Politics aside, the Affordable Care Act could affect your federal taxes this year and in years to come.
To help his clients, Marty McCutchen, a Fort Worth certified public accountant, has written The Pocket Guide to Obamacare
“It’s an 80-page book written in plain English,” he said. “I try to boil it down to make it simpler.”
The paperback guide doesn’t cover how to pick insurance, just the tax implications of the law, he said.
The self-published guide is available for free, McCutchen said. You can ask for a copy to be mailed to you at his website, www.CPAinDFW.com
The law’s tax implications aren’t as large as when President Ronald Reagan rewrote the tax code, but they are significant, said Blaise Bender, a CPA and attorney in San Antonio who will give a two-day class for local CPAs on federal tax updates in January.
“Historically, I would compare it to when President Carter implemented the windfall profit tax,” he said. “People don’t understand that there are tax implications.”
The two biggest changes, Bender said, are the penalty for not buying insurance and the additional tax, called a Medicare surtax, starting on wealthier households.
If you don’t buy insurance for next year, the penalty is relatively small — $95 per adult and half that per child, Bender said.
“A family of four with a $54,500 income would have a $272 penalty in 2013,” he said. “But by 2016, that penalty will increase to $2,085. Many families are dependent on their tax refund, and the penalty will be deducted from that.”
For those with much higher incomes this year ($250,000 in adjusted gross income for a married couple) the Medicare surtax will add a tax of 3.8 percent on net investment income and 0.9 percent on compensation, Bender said.
“That’s a big deal from a tax preparation standpoint,” he said. “Many who are getting taxed may not be paying enough in terms of withholding now and will owe that tax when they file.”
One possible way to lower your income and avoid the tax is to invest in a Roth IRA or convert a regular individual retirement account to a Roth IRA, he said.
Susan Adams, president-elect of the Fort Worth chapter of the Society of CPAs, said some employees are also having to make health insurance decisions for the first time if their employer drops coverage and pushes them to the new federal healthcare exchange.
“A lot of people are afraid because they haven’t had to make that decision before and are confused about the subject,” she said. “A lot of education is required.”
Adams, who works for Huselton, Morgan and Maultsby in Dallas, said many are also unaware that they are eligible for tax credits to help pay insurance premiums.
“The income levels are pretty high for the credit,” she said. “It goes up to 400 percent of the poverty level, which can mean a modified gross income in the $90,000s for a family of four.”
She cautions that the tax credit is based on estimated income.
“If your taxable income goes up when you file in 2015, you may have to refund the subsidy you got in 2014,” she said.
Teresa McUsic’s column appears Saturdays. TMcUsic@SavvyConsumer.net
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