July 22, 2013

How the 2010 Affordable Care Act affects individual Americans

In 2010 Congress passed the Affordable Care Act, also called Obamacare, which is now currently having major impacts on individual Americans. There are four major changes that started in 2013 with several more changes starting in 2014.

2013 Changes Affecting all Americans

Starting with the 2013 individual tax return to be filed in the spring of 2014, most Americans will lose the ability to deduct any medical expenses on those tax returns. President Obama’s bill has increased the amount of expenses needed before medical deductions are allowed to 10% of adjusted gross income. For example, if your family income is $80,000 you would need $8,000 of medical expenses before anything would be deductible, additionally, only amounts spent greater than $8,000 would be allowed. Americans who are 65 or over at the end of the year 2013, are allowed to use the previous 7.5% threshold for deductible costs through 2016.

Another change affects those employees utilizing an employer-sponsored fringe benefit called a healthcare flex spending account. These are excellent plans and should be utilized to the full extent possible for most people, but starting with the 2013 year the maximum amount you may set aside for this is $2,500 annually, per person, per employer. This means that a married couple may each defer $2,500 annually and if you work a second job that offers this plan you may defer an additional $2,500. Most Americans do not understand this plan but on $2,500 set aside for a health care FSA, the average American will save approximately $800 in federal income, Social Security and Medicare tax. This is one of the single best tax shelters available today for the average person.

2013 Changes Affecting Wealthier Americans

For taxpayers with wage or similar earned income over $200,000 (single) or $250,000 (Married, joint) they will pay an additional Medicare surtax of .9% for every dollar of earnings above this base amount. Lots of planning can be done in advance for this, so be sure to call our office if this potentially affects you.

For taxpayers with any type of income (not just earned income) greater than the above amounts, they will pay an additional 3.8% unearned income surtax on investment earnings such as interest, dividends, capital gains and other similar items.

Beginning 2013 higher income Americans will lose their ability to deduct themselves or their children as dependents and will also see most of their itemized deductions disallowed as income increases. Lastly higher income individuals will see an increase in the highest income tax bracket to 39.6% and an increase in the capital gains rate to 20%. Individuals with employee business expenses or substantial medical expenses should try to meet with us before the end of the year to determine if any actions need to be taken because of the loss of the ability to utilize itemized deductions on your individual tax return.

2014 Changes Affecting all Americans

Unless exempt, all Americans starting January 1, 2014, will be required to have reasonable quality health insurance for themselves and their dependents or they will have to pay a penalty in 2014. You are exempt if you already have qualified insurance such as Medicare or employer-provided coverage or meet one of the numerous other exemptions. New insurance exchanges, which open October 1, 2013, will allow all individual Americans to purchase their own health insurance in a price-competitive manner from government run agencies.

All health insurance will now be guaranteed; issues and pre-existing conditions must be covered without a premium increase. In fact the only premium differences allowed will be for age, family size, smoking, and geographical area differences.

A tax credit is given to be used every month towards insurance premiums for qualified individuals who are not able to afford insurance. Individuals will qualify for the credit if their costs exceed certain levels and if their income meets certain family size restrictions. We can discuss this as needed. The credit in 2014 is based on your 2013 income and if the credit is overestimated you may have to pay some or all of it back when you file your 2014 return in early 2015, so planning is extremely important.

The complexities this law adds to your individual tax return are immense and we are already attending special classes to obtain the most up to date guidance available to help you plan for these changes, avoid the additional taxes and penalties, and plan for the best tax treatment available. If anything in this letter affects you personally please call us for a tax planning meeting at 703-553-1099.

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