The Affordable Care Act (ACA) has had an enormous impact on the healthcare insurance of many Americans. There have been both positive and negative changes, but some of the most important changes impact personal finance, much of it centered on taxes. Altogether, there are 21 new taxes linked to the ACA, some of them tax hikes and some of them tax breaks. It’s probably no surprise that many of those tax changes are geared toward credits for low-income Americans and tax hikes for higher earners. Small business owners with annual incomes over $250,000 can also expect some changes to their tax bills. The federal government estimates that 85% of Americans who already have health insurance will see little or no change to their taxes. Of the remaining 15%, the tax changes revolve around three key components to the ACA:
- The individual mandate
- The employer mandate
- Tax credits linked to healthcare exchange plan premiums
Additionally, Americans who had previously invested in healthcare savings accounts (HSAs) and flexible savings accounts (FSAs) will also see new limits on healthcare-related tax deductions. For most of us, the biggest tax issue comes from the individual mandate, which says that all adults who can afford to do so must sign up for healthcare, either directly through an insurance company, or via a state or federal healthcare insurance exchange. There are some exceptions to this mandate:
- If the premium from the lowest-priced bronze plan purchased through a health insurance exchange in his or her home state is more than 8% of the purchaser’s household annual income
- If the purchaser’s annual household income is below the threshold for IRS tax filing statutes.
- If the purchaser qualifies for a tax exemption for religious beliefs, not being a U.S. citizen, being in prison, or belonging to an American Indian tribe.
Additionally, here are descriptions of some of the other ACA-related tax issues that may impact many working Americans:Tax on investment income - A new tax on investment income, which took effect in January 2013, places a 3.8% surtax on investment income for households with more than $250,000 in annual income or $200,000 for individuals. It is estimated that this tax will amount to $123 billion.Individual mandate - A new tax on both the individual mandate and the employer mandate, which took effect in January 2014. Anyone who doesn’t buy qualifying health insurance will have to pay an income surtax. On the employer side, companies with 50-or-more employees face taxes of $2,000 (non-deductible) for not offering health coverage, per employee. This tax will amount to an estimated $65 billion.Cadillac tax - An excise tax on so-called Cadillac health insurance plans favored by more affluent Americans. The tax applies to healthcare plans valued at $10,200 for individuals, and $27,500 for family plans. The tax takes effect on January 1, 2018. This tax may raise an estimated $32 billion.High bills tax - The tax on individuals who take a deduction based on having high medical bills. The old threshold of expenses exceeding 7.5% of AGI is replaced with a threshold of 10%, as of January 2013. From 2013-2016, Americans 65-and-over are exempt from this tax. This tax will amount to an estimated $15 billion.Health savings accounts tax -The ACA places a cap limit on flexible spending accounts of up to $2,500. There’s also a new tax called the medicine cabinet tax, where U.S. adults cannot use health savings accounts, flexible spending accounts or health reimbursement pre-tax dollars to buy non-prescription, over-the-counter medicines. The impact of this money being taxed should amount to $5 billion.High-risk tax - An annual $63 fee levied by the ACA on all plans (decreased each year until 2017 when pre-existing conditions are eliminated) to help pay for insurance companies covering the costs of high-risk pools.Medicare tax - A new 0.9% Medicare surtax applied to wages and self-employment income over $200,000 for individuals and $250,000 for married couples.Medicare tax on investments - A new 3.8% Medicare tax on investment income. According to the IRS, the 3.8% tax on net investment income applies to unincorporated taxpayers (most often individuals, estates, and certain trusts) who have modified adjusted gross income (MAGI) in excess of these annual income levels:$250,000 in the case of married taxpayers filing a joint return or a surviving spouse$125,000 in the case of a married taxpayer filing separately$200,000 for everyone else, except estates and trusts, where the threshold is equal to the highest amount at which the maximum tax rate begins (in 2013 it was projected to be $11,950.)As always it is best to consult a financial adviser or tax specialist to see the impact these taxes may have on your individual financial situation.
These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.