The Affordable Care Act introduces several new taxes and tax credits related to health insurance. It requires most individuals to have health insurance through state-run exchanges or pay a penalty. It also requires employers with 50 or more employees to offer affordable coverage or pay penalties. New taxes include a 0.9% Medicare surtax on wages over $200,000 and a 3.8% tax on investment income over $200,000. Individuals between 100-400% of the poverty level qualify for premium tax credits. Small businesses with under 25 employees averaging less than $50,000 in wages can receive up to a 50% tax credit for contributing to employee health insurance.

1. Tax Implications of the Affordable Care Act
Clive Grimbleby, President/Principal
Grimbleby Coleman CPAs

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
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6

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Questions?
Clive Grimbleby, CPA
Grimbleby Coleman
(209) 527-4220
cgrimbleby@gccpas.net