How the Affordable Care Act Affects Your Taxes

by Beth Davies ; Updated July 27, 2017
Changes to flexible spending accounts could increase your tax liability in 2013.

It’s not just a health care law. The Patient Protection and Affordable Care Act will have an impact on consumers’ and small businesses’ taxes come filing time in April 2014 and subsequent years -- even for those who haven’t bought a plan through the act’s insurance exchanges. The act, which Congress passed in 2010, includes a number of tax provisions that take effect in tax years 2013 and 2014, and later. Depending on your income, health plan and other factors, your tax bill could be higher or lower than in previous years. So tax preparers say it’s worth planning ahead with Affordable Care Act changes in mind. Doing so can help avoid the shock of an unexpected bill at filing time, or -- if a bigger refund would otherwise be on the table -- keep more money in your paycheck year-round instead. Six particular aspects of the act could affect you in coming years.

Really what they are trying to do is link health insurance and taxes.

Pamela Tahim, a tax attorney with Southern California law firm Tredway Lumsdaine & Doyle LLP

Lower Flexible Spending Account Limits

For tax year 2013, contributions to flexible spending accounts are limited to $2,500, said Pamela Tahim, a tax attorney with Tredway Lumsdaine & Doyle LLP, a Southern California law firm. FSAs let consumers set aside pretax dollars to fund out-of-pocket medical expenses. Before the ACA, the federal government imposed no cap, although employers often allowed employees to set aside no more than $5,000. For taxpayers in the 25 percent federal income tax bracket who previously put aside the full amount, cutting the limit in half is like adding $625 to their tax bills. A bright spot: the act lets employers offer workers a choice between rolling over up to $500 to use in the next year or a 2.5-month grace period in which to spend it. Plus, in 2014 and thereafter, the contribution cap will move up with inflation.

Higher Medical Deduction Thresholds

For individuals to claim out-of-pocket medical expenses as an itemized deduction for tax year 2013, those expenses must total at least 10 percent of their adjusted gross income. That’s up from a 7.5 percent threshold in previous years -- which means some individuals may not qualify and face higher tax bills as a result. Taxpayers age 65 and older -- along with their spouses -- get a reprieve. They can continue to go by the 7.5 percent threshold through 2016.

Extra Medicare Tax

Taxpayers with wages above a certain threshold for tax year 2013 will be subject to an extra 0.9 percent Medicare tax. The extra tax kicks in on earnings above $250,000 for married couples filing jointly, $200,000 for single filers and $125,000 for married couples filing separately, said Ryan McKeown, a certified public accountant and senior vice president with Wealth Enhancement Group. “It’s not that much in added tax,” he says,” but it’s insult to injury to those who are already paying high rates.”

Credit for Premiums Paid

Those who buy a health insurance plan through the health insurance marketplaces created by the act -- sometimes known as the "health insurance exchange" -- could be eligible for a credit toward a portion of premiums paid during 2014. The value of the credits is based on income and cost of insurance, Tahim said. Depending on how close a family is to the federal poverty level, the credit will cover premiums paid that exceed 2 percent to 9.5 percent of household income. “Really what they are trying to do is link health insurance and taxes,” she said.

You may have the credit paid to your insurer throughout the year to help cover premiums or you may claim it come tax time.

Information about your income must be as accurate as possible, Tahim said, noting that overestimating your income could result in higher health care bills throughout the year -- although you might receive a bigger refund after filing your income tax return. If you underestimate your income, she said, “You could end up owing some or all of that credit back.”

Penalty for Being Uninsured

Those who choose not to purchase health insurance will face consequences. “From a tax standpoint, you’re going to be penalized for not having insurance,” said Steve Jackson, a senior vice president of benefits administrator PrimePay. In 2014, the penalty for the uninsured is either $95 for adults and $47.50 for children or 1 percent of taxable income, whichever is greater. By 2016, it will be the greater of $695 or 2.5 percent of taxable income. The penalty will show up as tax owed when you file your income tax return.

More Taxes on Investments

Another change that affects high-income taxpayers starting in tax year 2013 is the 3.8 percent net investment income tax, also referred to as the unearned income Medicare contribution tax. Unearned income includes interest, dividends and rental income.

The IRS explains that you will owe the tax if you have net investment income and also have modified adjusted gross income over $250,000 (married filing jointly); $125,000 (married filing separately); $200,000 (single); $200,000 (head of household with a qualifying person); and $250,000 (qualifying widow or widower with a dependent child).

It applies only to net profits that exceed $500,000 for married couples filing jointly and $250,000 for single filers. According to Consumer Reports, those ceilings could be hit with the gain from selling a home that has appreciated in value.

Affordable Care Act Effects on Small Businesses

Small businesses aren’t taxed, per se, under the Affordable Care Act, but they are getting hit with a lot of taxes that are unintended consequences of the law, according to Steve Jackson, a senior vice president of benefits administrator PrimePay. “There’s some huge decisions for them to make,” Jackson said. A few factors may affect them.

Credits: Starting in 2014, small businesses can claim a credit worth up to 50 percent of premiums paid on behalf of employees enrolled in a qualified health plan offered through a small business health exchange. To be eligible, businesses must have fewer than 25 full-time employees with average wages of less than $50,000, and they must be covering at least 50 percent of the cost of single coverage for those employees.

Patient research fees: Until Oct. 1, 2019, employers must pay a small fee -- called the Patient-Centered Outcomes Research Trust Fund fee -- for each employee. “Overall, it’s not overwhelmingly expensive,” said Jackson. But it adds up. Employers owed $1 per covered employee for tax year 2013, and will owe $2 per employe in coming years.

Special taxes. The ACA included several taxes for specific kinds of businesses, said Pamela Tahim, a tax attorney with Southern California law firm Tredway Lumsdaine & Doyle LLP. For example, indoor tanning salons must collect a 10 percent tax from customers, while medical device manufacturers must pay a 2.3 percent tax on sales.

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