As tax season quickly approaches, your clients will begin to look at you, their tax preparer, as a source of information about the Affordable Care Act. It is important for you to be knowledgeable about how having health insurance or not having health insurance will affect their tax return and the new tax provisions set out in the Affordable Care Act. Read on about the changes that are set to begin in 2014 they may affect your clients.
How will my clients’ taxes be affected by the health care reform?
The new health care law does include some income tax filing changes but whether or not they affect your clients will depend on their particular circumstances. In 2013, joint filers with incomes over $250,000 and single filers with incomes over $200,000 will be subject to two taxes:
Medicare tax on earned income
: The tax will increase from 1.45% to 2.35% but only on income beyond the $200,000/$250,000 thresholds.
Medicare tax on investment income
: A 3.8% tax will be assessed on interest, dividends, capital gains, rent and royalty income, along with annuities from non-qualified plans. Investment income from retirement accounts is not subject to the tax.
Taxpayers at any income level could be subject to these changes:
Cap on flexible spending account (FSA) contributions
: In 2013, a cap of $2,500 goes into effect. Any account holdings above the cap become part of your taxable income. The cap will rise each year as the cost of living increases.
New limits on medical deductions
: In 2013, expenses used to deduct out of pocket medical expenses will rise from 7.5% to 10% for filers under age 65. If you are over 65, the law goes into effect in 2016.
One final change to note is that after 2013, your clients will be required to prove their health care coverage on their tax return each year. Your clients’ health insurance provider or employer will also have to submit relevant information to the IRS.
What is the Health Care Penalty if my client does not have Health Care Coverage?
If your client is required to purchase minimum essential health insurance and has not done so by March 31, 2014, they will receive a penalty. The tax penalty will be on their 2014 tax return filed in 2015.
The penalty in 2014 is $95 per adult, $47.50 per child, capped at $285 or 1 percent of household income depending on income.
Each year the penalty increases.
2015- $325 per uninsured adult in the household or two percent of the household income over the filing threshold (whichever is greater) and capped at $975 per household.
By 2016, it rises to $695 per adult, $347.50 per child, capped at $2085 or 2.5 percent of household income.
Note: There is no penalty for a gap in coverage less than three months.
Still have questions about the Affordable Care Act? Be sure to check our other articles on the Affordable Care Act