tax implications of the affordable care act
DESCRIPTION
How the Affordable Care Act will affect individuals and businesses.TRANSCRIPT
Tax Implications of the Affordable Care ActClive Grimbleby, President/PrincipalGrimbleby Coleman CPAs
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
