Your Money: Immediate tax consequences of the Affordable Care Act
January 7, 2014
While the news is filled with information about health care reform, very little is focused on the tax side of the law. To be honest, it’s quite complicated and I’ve buried my head in the sand as well, knowing that the law that was passed years ago would have many iterations before it went into action. But now that the 2013 tax filing season is upon us, reality has set in and it’s time to look at the changes.
The biggest change for 2013 is the additional tax for high-income workers, known as the Medicare surcharge or the Hospital Insurance Tax. This will apply to 2013 tax returns, those due to be filed in April 2014. This tax of .9 percent or 3.8 percent, depending on the nature of the income, will be tacked onto income amounts over $125,000 for those filing Married Filing Separately, $250,000 for those filing Married Filing Jointly, and $200,000 for all other taxpayers. If you work for an employer, this tax may be taken out of your paycheck, but there are many cases in which taxpayers will owe the tax at year’s end.
This additional amount owed may come as a surprise to many taxpayers. For example, if you and your spouse each earn $150,000 a year, your gross income would be $300,000, but since both of you fall under the $200,000 single filing limit, neither employer would withhold the extra tax, even though the couple would owe .9 percent on $50,000 of income. A similar scenario would happen if one spouse earned a wage limit over the threshold and the other spouse did not. Since a payroll system only knows information about their own employees, the spouse with lower earnings wouldn’t have the tax withheld but would still be subject to it at tax time.
The .9 percent surcharge will only affect earned income subject to Medicare tax already, meaning it will not affect those with income generated from S Corporation distributions, investments and passive activities such as rental properties. On the flip side, those with investment income, such as interest and dividends, will start paying a 3.8 percent Medicaid surcharge on their income over the thresholds.
“For years and years, you could deduct any medical expenses that were greater than 7.5 percent of your income, but starting in 2013 that amount increases to 10 percent, thus limiting your deduction.”
Another change that will hit those with high medical bills is the increase in gross income threshold for medical deductions. For years and years, you could deduct any medical expenses that were greater than 7.5 percent of your income, but starting in 2013 that amount increases to 10 percent, thus limiting your deduction. Adding to the confusion, this change applies only to tax returns where either the taxpayer or spouse is under age 65 (as of Dec. 31). Until the end of 2016, if one taxpayer is 65 or older, then the 7.5 percent threshold still applies.
While these two changes will affect only a limited number of taxpayers, the effects will be hard hitting. Since the provisions have been in effect all year with little discussion, I’m expecting quite a few surprises.
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit http://www.cpamichele.com.
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