Tax implication of the Affordable Care Act (ACA), also known as “Obamacare”:
Changes for 2016 include the addition of the Health Insurance Premium Tax Credit (see below) and the Individual Shared Responsibility Provision. The majority of taxpayers will see minimal impact on their 2016 federal taxes. If you don’t have insurance, remember you may qualify for the advanced premium tax credit or a government-sponsored plan such as Medicare or Medicaid. Marketplace open enrollment for 2017 is November 1, 2016 to January 31, 2017. To apply, go to www.healthcare.gov. If you previously signed up for coverage, you must re-enroll during open enrollment, even if you want to keep the same plan.
Penalty for not having health insurance in 2016: You must have minimum essential coverage for health insurance or pay a tax penalty. If you have employer sponsored health insurance, an individual plan you purchase yourself, or insurance through a government program (Medicaid or Medicare), you don’t need to purchase other health insurance. However, insurance only cover vision or dental care, worker’s compensation, coverage for specific diseases or condition or discount plan my not meet the requirements. If you don’t have health insurance in 2016, you will need to pay the penalty on your 2016 tax return (due on 4/18/17). The penalty increase to 2.5% of your annual 2016 household income or $695 per adult and $347.50 per Child (up to $2,085 per household), which is higher. You pay penalty for yourself, your spouse and each of your dependents. The penalty for 2017 is the same as 2016.
Health Insurance Premium Tax Credit: If individuals or families purchase health insurance through the Health Insurance Marketplace, they may qualify for the new Health Insurance Premium Tax Credit. To qualify for the credit, your household income must fall between 100 percent and 400 percent of the federal poverty line, you may not be claimed as a dependent on any other taxpayer’s return, and (if married), you must file jointly. In the case of spousal abuse or abandonment, this requirement may be waived.
The ACA Changes for All Individuals: Medical and Dental Expenses: Beginning January 1, 2013, you can deduct only the part of your medical and dental expenses that exceed 10% of your adjusted gross income (remain the same -7.5% if either you or your spouse was born before January 2, 1952). Beginning in 2017, medical and dental expenses will be deductible, regardless of the age of the taxpayer, only if they exceed 10% of the taxpayer’s AGI.
The ACA Changes for High-Income Households
Additional Medicare Tax on Wages and Compensation: For tax years beginning after December 31, 2012, if you earn more than $200,000 /Single, Head of household and qualifying widow(er) with qualifying person, $250,000 if Married filing Jointly or $125,000 if you Married filing separate in wages, compensation, and self-employment income, a 0.9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status. You may need to include this amount when figuring your estimated tax.
Net Investment Income Tax (NIIT). For tax years beginning after December 31, 2012, you may be subject to Net Investment Income Tax (NIIT), if your modified adjusted gross income is $200,000 or more ($250,000 if filing jointly, or $125,000 if married filing separately) . NIIT is a 3.8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. NIIT include incomes from interest, dividends, capital gains, rental and royalty income, and certain other investment income and reduce your investment expenses. Nonresident alien are not subject to the additional 3.8% tax. The 2016 taxable income at which the 39.6% income tax rate applies are over $457,600 for Married filing jointly or qualifying widow(er), over $432,200 for Head of household, over $406,750 for Single, and over $228,800 for Married filing separately.
New Higher Income Tax Rate: If your taxable income is more than $400,000 ($450,000 if filing jointly, or $425,000 if head of household, or$225,000 if married filing separately), your new tax bracket is 39.6% up from 35%. If you are in the new higher income tax bracket, your new tax rate on capital gains and dividends is 20% – up from 15%.
Limitation on Itemized Deductions: If you have a high adjusted gross income, you may not be able to take all your itemized deductions, thanks to the Pease provision. Itemized deductions start to phase out at $154,950 if you are married filing separately ($258,250 for individuals, $284,050 if head of household, or $309,900 if filing jointly). Your itemized deductions are reduced by 3% of your adjusted gross income over these amounts, but they are never reduced by more than 80% of your otherwise allowable deductions.
Personal Exemption Phase out (PEP): Your personal exemptions for yourself, your spouse, and your dependents reduce your taxable income by $4,000 each. If your adjusted gross income is over $258,250 ($154,950 if married filing separately, $309,900 if filing jointly, or $284,050 if filing as head of household), your personal exemptions are reduced by 2% for each $2,500 or portion over these amounts. The exemption phases out completely at $380,750 ($432,400 if filing jointly, $216,200 if filing separately, $406,550 if filing as head of household).
The ACA also included changes for small businesses owners:
ACA Related Tax Change – Small Business Tax Credit Increased
A small employer health insurance premium credit is available to eligible small employers who
provide employee health insurance coverage. The average annual wage at which the small business premium credit begins to be reduced is increased to $25,900 in 2016.
ACA Related Tax Change – Large Employer Shared Responsibility: The Employer Mandate
Applicable large employers—employers employing 50 or more employees—must offer full-time employees and dependents health plan coverage at least equal to minimum essential coverage beginning in 2016 or face a tax penalty. Although the requirement to offer coverage to full-time employees and their dependents only affected employers with 100 or more employees in 2015, it applies to employers employing 50 or more employees beginning in 2016.