On January 2, 2014, the Patient Protection and Affordable Care Act, also known as “Obamacare,” completed its phase-in and is now in full effect. You may be wondering what it means for you.
The law, which requires most U.S. citizens and legal residents to be covered by health insurance, has financial implications even for those who already have insurance. Some people may be surprised to learn that these implications go beyond healthcare costs. New taxes may have ripple effects on investments and retirement savings. Here are a few ways that the Affordable Care Act might affect you.
Beginning in 2013, individuals cannot contribute more than $2,500 to a healthcare flexible spending account (FSA). In November 2013, Congress amended the “use it or lose it” rule, where employees forfeit any unused contributions. Now, employers may change their offerings so employees can roll over up to $500 in unused funds for use in the following year. Check with your employer to see if your company offers that option.
You may be able to deduct less in expenses than previous years. Starting in 2013, the threshold for deducting unreimbursed medical expenses on Schedule A increased to 10% of a taxpayer’s adjusted gross income (AGI). For taxpayers over age 65, the threshold remains at 7.5% of AGI through 2016.
You may see an increase in your Medicare payroll tax beginning in 2014. Individual taxpayers will pay 2.35% on wages in excess of $200,000. That tax applies to wages in excess of $250,000 for married couples. The current rate of 1.45% will still apply to wages below these levels.
In some cases, yes. Individuals will be subject to a 3.8% surtax on net investment income or their annual earnings over a certain threshold amount. The surtax will be imposed on the lesser of:
Example: A married couple filing jointly in 2014 with $325,000 in MAGI — $100,000 of which is net investment income — will pay the 3.8% surtax on the net investment income in excess of the $250,000 threshold. In this case, that is $75,000 of taxable income ($325,000 less the $250,000 threshold for married couples). The additional 2014 federal tax liability for this married couple could be about $2,850.
The surtax liability is determined on income before any tax deductions are considered. Therefore, many individuals who have a large amount of deductions could be in the lowest tax bracket and still have investment income that is subject to the surtax.
The 3.8% surtax does not apply to distributions from IRAs, Roth IRAs, and other qualified plans. In addition, contributions to these plans provide tax-deferred growth opportunities. Therefore, individuals should consider maximizing contributions to IRAs, 401(k) plans, 403(b) plans and 457 plans. However, required minimum distributions for those over age 70½, as well as Roth conversion income, will increase MAGI as those distributions are considered ordinary income.
Income from certain vehicles is not considered investment income. Investment in such vehicles helps avoid the surtax. These include:
|Filing Status||Threshold Amount|
|Married filing jointly||$250,000|
|Married filing separately||$125,000|
|All other single taxpayers||$200,000|
|Trusts and estates||Beginning at the top bracket which is $11,650|
1 MAGI is the sum of adjusted gross income plus the net foreign income exclusion amount.
The tax information herein is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. It was written to support the promotion of the Wealth Management Group services. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
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This material is for informational purposes only and represents TIAA-CREF's interpretation of applicable law. It is presented with the understanding that TIAA-CREF (or its affiliates, distributors, employees, representatives and/or insurance agents) is not engaged in rendering legal or tax advice.
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