Tax Aspects of the Affordable Care Act – Individuals and Families

By Yigang Xu, CPA
XU CPA, LLC
Greenville, SC
www.mygreenvillecpa.com

In the previous article “Basics of the Affordable Care Act”, I have discussed a few of the very basic concepts of ACA, like the individual mandate, the essential minimum coverage, penalty and the marketplace. In this article, I will discuss some tax aspects of ACA that impacts individuals and families.

Additional Medicare Tax
Effective in 2013, a 0.9% of additional medicare tax applies to wages, compensations (2.35% employee medicare share) and SE income (3.8% SE medicare rate) above the following threshold:​

An employer will have to withhold this additional medicare tax from wages in excess of $200,000 in a calendar year from an employee regardless of the individual’s filing status. In some cases, an individual may owe more additional medicare tax than the amount withheld, depends on the filing status, other jobs and spouse income.

For example, an individuals with two different jobs having a $125,000 W2 income each, no additional medicare tax will be withheld, if this individual is single, he will owe an additional medicare tax of $450 ($50,000*.9%). Another example, if an individual has W2 income of $150,000, and spouse has SE income of $150,000 no additional tax will be withheld, but this couple will own an additional medicare tax of $450. ($50,000*.9%).

Net Investment Income Tax
Section 1402 of the Health Care and Reconciliation Act of 2010 which amends the ACA bought into this new net investment income tax, effective in 2013, a 3.8% surtax applies to net investment income (NII) if taxpayer has modified adjusted gross income (MAGI) is above $200,000 (single taxpayer) or $250,000 for married filing jointly.

Net investment income includes interest, dividends, annuities, royalties and rents which are not derived in the ordinary course of trade or business, active S corporation or partnership income are excluded.

This surtax is calculated based on the lesser of a taxpayer’s modified adjusted gross income  (MAGI) over the threshold or the taxpayer’s net investment income (NII), for the detail calculation of this tax, please consult your tax advisor.

For high net worth taxpayer who harvest a large amount of investment income, it is worth the effort to transfer some of the investment to their children to save this 3.8% surtax. Nothing will change to the tax rate of 39.6% on the child’s return due to kiddie tax, but theoretically a maximum tax benefit of $7,600 (assume $200,000 of investment income is shifted to one child) can be achieved for these taxpayers.


Employer Provided Health Insurance Exclusion

This provision of ACA is not very new now, effective in 2012 with certain relief provided, employers are now required to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, in Box 12 using Code DD.
Many taxpayers may not be aware of this, that the exclusion of employer provided health insurance from income constitutes the single largest bugetary tax expenditure according to the Treasury Department, a stunning 212 billion dollars for 2014. Now under the new provision of ACA, this number although still non-taxable, is required to be reported on Form W-2.

When you get your W-2 this January, Box 12 DD will show the amount of employer provided health insurance, but this amount is not taxable.


Premium Tax Credit

Taxpayers who get health insurance coverage through the Marketplace may qualify for Premium Tax Credit  if they meet certain criteria, chiefly their income level. Maximum amount of premium a household would have to pay is determined by their income level. For example, a family of 4 making an annual income of $94,000, the maximum amount of premium they would have to pay is $8,930, if the insurance premium at the Marketplace is $10,000, they would qualify for a credit of $1,070.

Premium tax credit (a refundable credit) can be claimed when tax return is filed, or to be requested in advance  and paid directly to the insurance company. There is also a cost sharing assistance which put a cap on out-of-pocket expenses limit for lower-income taxpayers.

Summary
The Affordable Care Act has bought many changes into American taxpayers and families, besides these main items such as the 1) additional medicare tax, 2) net investment surtax, 3) shared responsibility penalty, there are other miscellaneous tax and reporting changes like the 1) reporting of employer provided health insurance, 2) over the counter medical expense, 3) itemized medical expense deduction, 4) penalty for non-medical withdrawal from health saving account and etc.

Thanks for reading.

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