Whether you like it or not, the Affordable Health Care Act is now in effect. While the law is still being debated and has an uncertain future, for right now, it will certainly affect your taxes this year. Here's what you need to know about how Obamacare will affect your taxes.
The tax year for individuals runs with the calendar year. Taxes paid on April 15, 2014 are for the period from January 1, 2013 to December 31, 2013. Because the mandate to have health coverage was effective January 1, 2014, there is no change to 2013 taxes or the payments due this April.
Because the law requires all individuals to have health coverage, employees will see a change to their W2s this year. Noted on the form will be whether they are enrolled in employer-provided health coverage. The change in the form is only an informational one and does not affect what you pay.
The Tax Penalty
Beginning in 2014, all individuals who do not have health coverage through their employers and who have not obtained health coverage will be forced to pay a tax penalty. For 2014, this penalty is the greater of 1% of their adjusted gross income or $95 per person. For 2015, the penalty increases to the greater of 2% of AGI or $325 per person. For 2016 and beyond, the full penalty of the greater of 2.5% of AGI or $695 per person will be in effect. This tax is prorated by month if an individual only has health coverage for part of a year.
Other taxes are also being added to fund the new healthcare system. For those making over $200,000 per year in investment income ($250,000 for joint filers), there is a new Medicare tax of 3.8% on that income. The threshold to allow medical expenses to be deducted is being increased so that medical expenses must have been greater than 10% of a person's income instead of 7.5%. Changes are also being made to health savings accounts and consumers will indirectly pay additional taxes that are being imposed on health providers and other businesses.
How the Subsidies Work
For plans purchased on the health care exchanges, subsidies in the forms of tax credits are being offered to those meeting income requirements. Subsidies are available to those making up to 400% of the poverty level. At that level, plan premiums are capped at 9.5% of AGI, and any remaining amount is subsidized. For those earning less, the cap is as low as 2%.
The process for receiving the subsidies is surprisingly simple. Upon signing up for a plan on the health care exchange, individuals are asked to estimate their income for the following year. For each plan, they will see the total price and the subsidy amount. Upon enrolling, they can either elect to pay the plan in full and receive the subsidy as a tax refund or to have the IRS automatically pay part of their premiums and only pay the remaining balance each month.
If an individual's income ends up being lower than estimated, they will receive any additional subsidy they should have received as a tax credit when filing their taxes the next year. If income is higher than expected, any excess subsidies paid to the individual will be added to the amount they owe on their taxes.
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