The Affordable Care Act has been receiving a lot of attention in the news lately, mostly because of the issues with the website and the individuals who are losing their health plans with no ability to easily obtain a new one through the exchanges. However, there is another part of the ACA that does not receive as much attention, but will affect (in one way or another) every American; the tax implications.
In order to pay for this legislation, a whole series of mandates and changes to the tax laws were implemented. Some of these changes affect primarily individuals, while others are geared toward businesses. Here is a breakdown of the various tax changes, those that are already implemented, and those that are scheduled to kick in during the next few years.
ACA Mandates and Tax Changes for Individuals
The Individual Mandate: Without a doubt, the largest change in the ACA for individual Americans is the requirement to purchase health insurance. This is an unprecedented change in the law that requires an individual to proactively purchase a product, or pay a fine to the IRS. In June 2012, the Supreme Court upheld a challenge to the individual mandate by declaring it to be a “tax”, affectively allowing most of the ACA to remain intact.
Should an individual choose not to buy health insurance, the fines are minimal at the start. In 2014, an individual would owe just $95 (or 1% of AGI). In 2015, the fine goes up to $325(or 2% of AGI), and up to $695(or 2.5% of AGI) in 2016. From there, it will be adjusted for inflation.
Additional Medicare Tax: Starting in 2013, a .9% Medicare tax was added for individuals earning $200,000 or more, and married couples (filing jointly) earning $250,000 or more.
Changes to the Adjusted Gross Income (AGI) Limit for Medical Expense Deductions: Starting in 2013, medical expenses must be in excess of 10% of AGI to qualify for an itemized deduction on your federal income taxes. This is up from the current threshold of 7.5%. For seniors (over 65), the 7.5% threshold remains until 2016.
Health Savings Accounts (HSA) Withdrawal Penalties Doubled: Starting in 2011, the penalty for an early withdrawal from an HSA went from 10% to 20%, this puts these accounts at a tax disadvantage relative to 401Ks and IRAs, which are still at 10% early withdrawal penalty.
Flexible Spending Account (FSA) Cap: Starting in 2013, health care flexible spending accounts were capped at $2500. Going forward, this amount will be indexed for inflation.
3.8% Investment Income Surtax: Beginning in 2013, individuals earning $200,000 and married couples (filing jointly) earning $250,000 will be subject to a 3.8% tax on investment income such as capital gains and dividends.
Stay tuned for Part II where we cover even more taxes and provide solutions for small businesses.
