The changes made to insurance coverage and the woes of Healthcare.gov brought about by The Affordable Care Act, also known as ObamaCare, have grabbed headlines recently. However, as the end of the year approaches, it is important to remember that ObamaCare also made several tax law changes that taxpayers will need to know about when preparing their tax returns for 2013.
Following are the three main tax law changes that will affect many Americans.
Increased Floor for Deducting Medical Expenses
ObamaCare has raised the floor medical expenses must exceed in order for a taxpayer to deduct those expenses.
Historically, taxpayers could deduct medical expenses when they exceed 7.5 percent of adjusted gross income and they choose to itemize deductions. Starting with tax returns filed for 2013 for taxpayers under the age of 65, medical expenses must exceed 10 percent of the taxpayer’s adjusted gross income.
For taxpayers 65 years old or older, the floor for deducting medical expenses remains at 7.5 percent of adjusted gross income.
Increased Medicare Tax on Adjusted Gross Income
ObamaCare has raised the Medicare tax levied on the adjusted gross income of certain taxpayers by 0.9 percent. The taxpayers affected by this increase in Medicare tax depend on their level of adjusted gross income.
Taxpayers who file as Married Filing Separately will see the Medicare tax increase on wages earned above $125,000. Taxpayers who file as Single, Head of Household, or Qualifying Widow/Widower will see the Medicare tax increase on wages earned above $200,000. Finally, taxpayers who file as Married Filing Jointly will not see the Medicare tax increase on wages until they earn at least $250,000.
Employers will automatically withhold the additional 0.9 percent of income for any wages earned beyond these thresholds.
New Medicare Tax on Net Investment Income
ObamaCare has created a new Medicare tax on net investment income above a certain threshold. Investment income includes income earned from stocks, bank accounts, and similar investments, including interest, dividends, and capital gains. Investment income also includes income from rental property.
The tax law changes levy the new Medicare tax at the rate of 3.8 percent of the smaller of net investment income or adjusted gross income above a threshold based on a taxpayer’s filing status. The adjusted gross income level for this calculation is $125,000 for those filing as Married Filing Separately; $200,000 for those filing as Single, Head of Household, or Qualifying Widow/Widower; or $250,000 for those filing as Married Filing Jointly.
Beyond the changes not above, it is also worth noting that certain taxpayers who do not have insurance coverage provided by an employer and must therefore purchase insurance through a marketplace may be eligible to receive a tax credit. The amount of the tax credit for a given taxpayer varies based on the insurance premium amount, members of the household, and income level.
However, the amount of the tax credit for a given taxpayer remains unclear, as many taxpayers are finding that a tax credit promised to them initially has later been changed or taken away altogether as the government works to address problems with the Healthcare.gov web site.
In addition, for the 2014 tax year, remember that taxpayers who do not maintain health insurance for at least three months during the 2014 calendar year will have to pay a penalty on their tax returns due April 2015.
Assistance with Tax Law Changes and Preparing Your Tax Return
If you need help understanding the tax law changes put into effect by ObamaCare or preparing your tax return, you can get that help from a tax attorney by calling the phone number located at the top of this web site. Only a tax attorney has the training and experience to apply the tax law correctly and offer the benefits of attorney-client privilege in the event of an IRS audit or other legal matters related to your tax return.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.