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The Affordable Care Act: How Does It Affect You?

An IRS Nationwide Tax Forum held in San Diego yielded valuable information on how the IRS intends to proceed with the Affordable Care Act (ACA). The following are some highlights of that forum.

During the meeting, the IRS representatives said implementing the ACA will require significant information reporting. For example:

• The IRS will be required to provide information to the state health insurance exchanges that will be established starting in 2014, with the first exchange expected to open in the fall of 2013. Exchanges will need information about household income and size, and since information about ?households? is not currently required, additional information may have to be reported on Form 1040.

• Employers will be responsible for reporting the insurance coverage they provide to employees so that the IRS can determine whether individuals are eligible for a premium tax credit.

• Beginning in March 2013, employers will send numerous notices to employees informing them about coverage options, the premium tax credit, etc., which may trigger questions for tax preparers.

What?s New?

Increased Medicare tax for high-earning workers and self-employed taxpayers: Right now the Medicare tax on salary and/or self-employment (SE) income is 2.9 percent. If you?re an employee, 1.45 percent is withheld from your paycheck, and the other 1.45 percent is paid by your employer. If you?re self-employed, you pay the whole 2.9 percent yourself.

Starting in 2013, an extra 0.9 percent Medicare tax will be charged on:

1. Salary or SE income above $200,000 for an unmarried individual;
2. Combined salary or SE income above $250,000 for a married joint-filing couple and
3. Salary or SE income above $125,000 for those who use married filing separate status. For self-employed individuals, the additional 0.9 percent Medicare tax hit will come in the form of a higher SE bill.

Higher threshold for deducting medical expenses: Currently you can claim an itemized deduction for medical expenses paid for you, your spouse and your dependents to the extent the expenses exceed 7.5 of AGI. Starting in 2013, the hurdle is raised to 10 percent of AGI. However, if either you or your spouse is age 65 or older at year-end, the 10 percent-of-AGI threshold will not take effect until 2017.

Flexible spending account cap: The 24 million Americans who have flexible spending accounts will face a new federally imposed $2,500 annual cap for 2013. These pretax accounts, which currently have a $5,000 federal limit, are used to purchase everything from contact lenses to children?s braces.

New 3.8 percent Medicare tax on investment income: The maximum federal income tax rate on long-term capital gains and dividends is currently 15 percent. Starting in 2013, the maximum rate on long-term gains is scheduled to increase to 20 percent, and the maximum rate on dividends is scheduled to increase to 39.6 percent as tax cuts expire.

But that?s not all. Also starting in 2013, all or part of net investment income?including long-term capital gains and dividends?collected by higher-income individuals could get socked with an additional 3.8 percent tax, dubbed the ?Medicare contribution tax.? Therefore the maximum federal rate on long-term gains for 2013 and beyond will actually be 23.8 percent (vs. the current 15 percent), and the maximum rate on dividends will be a whopping 43.4 percent (vs. the current 15 percent). Yikes!

The additional 3.8 percent Medicare tax applies to: Single individuals with adjusted gross income (AGI) above $200,000 or couples filing a joint return with more than $250,000 AGI.

The additional 3.8 percent Medicare tax will apply to the lesser of net investment income or the amount of AGI in excess of the applicable threshold. Net investment income includes interest, dividends, royalties, annuities, rents, income from passive business activities, income from trading in financial instruments or commodities, and gains from assets held for investments such as stock and other securities. (Gains from assets held for business purposes are not subject to the extra tax.)

I will be posting more on this in the coming months!

Last Updated by Michelle Matlin on 2012-10-03 11:43:48 AM