The Affordable Care Act (aka Obamacare or ACA) will have a limited, if any, impact for most taxpayers. However, there are several items to be aware of when completing your tax return.
1) Itemized Medical Deduction
There has been an increase in the itemized medical deduction threshold for taxpayers below the age of 65, the threshold for deducting qualified out-of-pocket medical expenses has increased to 10% of AGI. For those 65 and older the 7.5% AGI threshold is still in effect through 2016.
2) Additional Medicare Tax
For taxpayers in higher tax brackets, there is now an additional Medicare tax that gets calculated and reported on the tax return. The rate is 0.9% on wages, compensation and self-employment income above $250k for married filing jointly (MFJ) and $200k for single.
3) Net Investment Income Tax
The ACA law has also added a Net Investment Income tax of 3.8% on certain investment income for MFJ taxpayers with modified adjusted gross income (MAGI) above $250k and single taxpayers with MAGI above $200k. This could particularly impact affluent retirees with substantial IRA, pension, dividend and interest income.
Looking Ahead
For 2014 tax returns due to be filed in April 2015, the Individual Shared Responsibility Provision requires that each individual have minimum essential health coverage or pay a penalty. The 2014 penalty is calculated either by 1% of household income above the filing threshold or $95 per person, whichever is higher. For 2015 the penalty increases to 2% of household income or $325 per person. For 2016 it is 2.5% of income and $695 per person.
Given that the penalty as well as the Premium Tax Credit (health insurance subsidy for those below certain income limits) are to be reported on tax returns beginning next year, it’s not surprising that tax preparers are becoming facilitators for Obamacare enrollment. Open enrollment for buying coverage ends March 31st, otherwise you will have to wait until 2015 open enrollment begins in November.
