Tax Implications of the Affordable Care Act


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How the Affordable Care Act will affect individuals and businesses.

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Tax Implications of the Affordable Care Act

  1. 1. Tax Implications of the Affordable Care Act Clive Grimbleby, President/Principal Grimbleby Coleman CPAs
  2. 2. Today’s Agenda Individual Mandate Employer Mandate The New 3.8% Medicare Tax Tax Credits for Individuals Tax Credits for Small Business 1 The New 0.9% Medicare Tax 2 3 4 5 6
  3. 3. Summary • Requires most U.S. citizens and legal residents to have health insurance. • Creates state-based exchanges through which individuals can purchase coverage: • Premium and cost-sharing credits available to individuals/families with income between 133-400% of the federal poverty level. • Separate exchanges through which small businesses can purchase coverage • Requires employers to pay penalties for employees who receive tax credits for health insurance through an exchange. • Expands Medicaid to 133% of the federal poverty level.
  4. 4. Role of the IRS • Collect additional taxes • Additional 0.9% Medicare Tax above certain income thresholds • Additional 3.8% Net Investment Income Tax • Collect information from employers and insurers • Insurers to provide IRS and policyholders a form verifying coverage status, and individuals must include those forms with their return. • Determine who qualifies for subsidies or Medicaid • Health exchange application info to be cross-checked with IRS data to determine who is eligible for premium credits or Medicaid. • Determine who must pay a penalty • Penalize individuals who do not buy qualified health insurance • Penalize employers for unaffordable coverage
  5. 5. Individual Mandate • Requires U.S. citizens and legal residents to have qualifying health coverage. • Those without coverage pay a tax penalty of the greater of: • $695 per year, up to a maximum of three times that amount ($2,085) per family, • or 2.5% of household income. • Exemptions will be granted for financial hardship, religious objections, those without coverage for less than three months, those for whom the lowest cost plan option exceeds 8% of an individual’s income , and other reasons. • IRS may not use liens or levies to collect the penalty. Tax Implications
  6. 6. Individual Mandate • Reporting provisions to go into effect in 2014. • Will not have to account for coverage or exemptions or make payments until the 2014 return is filed in April 2015. • Information to be made available later about how the income tax return will take into account coverage and exemptions. • Insurers will be required to provide everyone they cover with information that will help demonstrate they had coverage. IRS Reporting Requirements
  7. 7. Employer Mandate • Two ways to get penalized: • For employers with 50 or more FTE employees who do not offer coverage and who have at least one FT employee who qualifies for a premium tax credit: • Assess a fee of $2,000 per employee (excluding first 30 employees) • For employers with 50 or more FTE employees that offer inadequate or unaffordable coverage, and have at least one FT employee who qualifies for the tax credit: • Assess lesser of $3,000 for each employee receiving a premium credit or $2,000 for each FT employee (excluding first 30 employees) • Employers with up to 50 FTE employees are exempt from the above penalties. Tax Implications
  8. 8. Employer Mandate • IRS will contact employers to inform them of their potential liability. • Employers will have opportunity to respond before any liability is assessed. • IRS contact will not occur until after: • Individual tax returns are due claiming premium tax credits • Employer information returns are due identifying their FT employees and describing the coverage that was offered. Reporting Requirements
  9. 9. The New 0.9% Medicare Tax • Increases the Medicare Part A tax rate on wages by 0.9% (from 1.45% to 2.35%) on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly. • Effective January 1, 2013 Tax Implications
  10. 10. The New 0.9% Medicare Tax • Employers are required to withhold on individual wages over $200,000, even if the $250,000 threshold for joint filers is not met. • Employers who do not deduct and withhold additional Medicare Tax as required are liable for the tax unless it is paid by the employee. • Form 941 has been revised to include Taxable Wages subject to the additional Medicare Tax withholding (line 5d). Reporting Requirements
  11. 11. The New 0.9% Medicare Tax • Jack and Diane, a married couple, earn wages of $125,000 and $175,000 respectively. For the first $250 000 of combined wages the Medicare tax is: • $250,000 1.45% = $3,625 • The next $50,000 is taxed at the higher rate of 2.35% (1.45% + .9%): • $50,000 2.35% = $1,175 • The combined Medicare Tax is $4,800 • The new additional tax is $50,000 x .009 = $450 • Note: The employer is not required to withhold the $450. Example
  12. 12. The New 3.8% Medicare Tax • Imposes a 3.8% tax on unearned income for higher-income taxpayers. • Surtax is imposed on net investment income (interest, dividends, royalties, rents, capital gains, non-qualified annuities, passive income from a trade or business, or income from the business of trading in commodities or financial instruments). • Excludes wages, unemployment compensation, interest on tax exempt bonds, Social Security, alimony, non -taxable gain on the sale of a principal residence, non-passive trade or business income, and retirement plan distributions. • Effective January 1, 2013 Tax Implications
  13. 13. The New 3.8% Medicare Tax • For individuals, the tax will be reported and paid with Form 1040. • For an individual, the tax is 3.8% of the lesser of either: • Net Investment Income, or • The excess of Adjusted Income over a threshold amount. Thresholds are: • $250,000 for joint filers, • $125,000 for married filing separately, or • $200,000 for all others Reporting Requirements
  14. 14. The New 3.8% Medicare Tax • For 2013, John, a single taxpayer, has net investment income of $100,000 and Adjusted Gross Income of $220,000. • The tax is imposed on the lesser of net investment income ($100,000) or AGI over $200,000 ($220,000 – $200,000) • The surtax is $20,000 3.8% = $760 • Assume that in the previous example Adjusted Gross Income was $300,000 • AGI exceeds threshold amount by $100,000 • The surtax is: $100,000 3.8% = $3,800 • Note: The surtax is not deductible. Example
  15. 15. Tax Credit for Individuals • Provides refundable premium credits to eligible individuals and families with incomes between 100% and 400% of the Federal Poverty Level to purchase insurance through state exchanges. • Premium credits will be tied to the second lowest cost plan in the area and will be set from 2% to 9.5% of income. • The credit can also be paid in advance to the insurance company to help cover the cost of premiums. Tax Implications
  16. 16. Tax Credit for Individuals • The taxpayer is only eligible for the credit if employer coverage is unaffordable: • The employer plan is unaffordable If the employee must pay premiums that exceed 9.5% of household income • Eligibility is based on income level two years before the enrollment period. Reporting Requirements
  17. 17. Tax Credit for Individuals • Rob and Laura are married and his employer plan requires him to contribute $5,000, which is 10% of their household income of $50,000. • At first glance, they would appear to qualify for the credit. • However, the self only coverage for Rob is $3,000, which is only 6.0% of household income. • Therefore, Rob and Laura do not qualify for the credit since the self only coverage does not exceed 9.5% of household income. Example
  18. 18. Tax Credit for Small Business • Provides a tax credit to employers who purchase health insurance and have no more than 25 employees and average wages of less than $50,000: • Phase I, through 2013 – Tax credit of up to 35% of employer’s contribution to employee’s insurance premium, IF employer contributes at least half of total premium cost or half of a benchmark premium. • Phase II, 2014 and after – For eligible businesses that purchase through the state exchange, tax credit of up to 50% of the employer’s contribution to employee’s insurance premium, IF employer contributes at least half of the total premium cost. • Owners and family members do not count toward the employee total. Tax Implications
  19. 19. Tax Credit for Small Business • Use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. • Small businesses may be able to carry the credit back or forward. • Tax-exempt employers may be eligible for a refundable credit. Reporting Requirements
  20. 20. Questions? Clive Grimbleby, CPA Grimbleby Coleman (209) 527-4220