The Affordable Care Act has been ruled constitutional, but Congress’ ability to take Medicaid away from states who refuse to implement the voluntary portions of the act is not. Many of you are wondering now how this will affect you. Click here for a list of the tax increases and benefits written in to the Affordable Care Act.
So what will change in your life? Is healthcare free now? Are you going to jail if you don’t have health insurance? Should you start hiring/firing? Let’s look at how the healthcare act will actually affect you.
Some of the effects of the act are already in place. For example, companies with fewer than 15 employees and average wages less than $50,000 who cover more than half of their employees’ health insurance can get a tax credit worth up to 35% of their health insurance costs. The key words here are “up to” 35%. The credit starts shrinking when you reach 10 employees and average wages of $25,000.
This year you will see another change as all companies will be required to make two major reporting changes. First, you will need to report the health insurance you pay on your employees’ behalf on their W-2 forms. It won’t be taxable income to them, but it will require you going back through your records at the end of the year and making sure your payroll provider has the correct information. Second, you will need to report sales from form 1099-K separately on your tax return. 1099-K will represent the sales you receive through your credit card merchant services provider. To avoid costly amendments, make sure you submit these 1099-K forms to your accountant before your corporate return is filed. This will cause filing delays as well.
Starting in 2014, if you have 50 or more employees you will have a choice: provide low cost health insurance to your employees or pay a penalty tax of between $2,000 and $3,000 per employee. This means that an employer with 50 employees that does not provide low cost health insurance will owe between $100,000 and $150,000 in penalty taxes. The penalty is $2,000 per employee, but jumps to $3,000 for employees who receive tax credits to purchase health insurance from the insurance exchanges.
A special note for S Corp shareholders: if you actively participate in your S Corporation, your income from the S Corp will not be subject to the 3.8% investment income tax described later. Make sure you are paying yourself a reasonable salary and can demonstrate your active participation and get that target off your back.
One thing the Affordable Care Act did not do is make health insurance free. However, starting in 2014 if you work for a company with 50 or more employees, your employer will be penalized for not offering you low cost insurance. Otherwise, starting in 2014 there will be tax credits available if your household income is below 400% of the poverty level. A word of caution, if your state cannot afford or chooses not to set up a state health insurance exchange, a glitch in the law does not provide tax credits for people who purchase from the Federal backup exchange. Currently the IRS is stating that they will allow the credit anyway, but the law is not written that way.
Another benefit of the Affordable Care Act is the ability to keep dependents on your health insurance plan up to age 26. However, another word of caution is in order. If your child is a college student, you may be able to find individual student insurance plans for far cheaper than the cost of adding them on to your employee plan. Insurance companies will also no longer be allowed to turn people away for pre-existing conditions.
It’s not all good news. Some tax increases will hit select individuals and families from nearly any income range. HSA and FSA owners will be affected. Already HSA owners can no longer use their plans to pay for over the counter medicine, and the penalty is doubled for early distributions. FSAs, which were previously unlimited, will now be limited to $2,500 annually. The other tax change that will hit individuals and families with high medical costs is the increase in the AGI floor for medical expenses. Currently, you can deduct medical expenses over 7.5% of your adjusted gross income as itemized deductions. Starting in 2013, you will only be able to deduct medical costs that exceed 10% of adjusted gross income.
Perhaps the most infamous tax in the Affordable Care Act is the penalty on individuals and families who do not purchase health insurance. Will this affect you? Yes, if you are uninsured and choose to remain uninsured. The question we hear most often is what can the IRS do to you if you don’t pay the tax. Unlike other taxes, the IRS is not authorized to levy your assets or throw you in jail if you don’t pay the Healthcare penalty. However, they can sue you for up to twice as much as the original penalty. They can also reduce your refund if you don’t report the penalty.
How will they know? Beginning in 2014, you will need to report your health insurance coverage to the IRS. This will likely include what level of coverage you have and what company it is with. This will be additional information you will need to get to your tax accountant.
Fewer will experience the .9% Medicare surcharge on income and 3.8% Medicare surcharge on investment income. Individuals with income of $200,000 and families with income of $250,000 will experience these taxes. An issue that is certain to arise is how families will ensure these taxes are being paid throughout the year. For example, if a husband makes $195,000 and a wife makes $60,000, in many cases the employer will not know to withhold the additional .9% in Medicare taxes from their income in excess of $250,000. In lieu of requiring spouses to file W-4s with each others employers, we anticipate that the additional Medicare surcharges will be recovered on the family’s 1040 at the end of the year.
As you can see from reading this, it will be more important than ever to communicate with your tax accountant and plan ahead. For high income tax payers, the Medicare surcharges could create thousands to tens of thousands of dollars in additional, unanticipated taxes on April 15th. Businesses will also need to work with their accountant and payroll company to ensure that the new requirements are being met.