What the Affordable Care Act Means for You

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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.

Does the Affordable Care Act affect my flexible spending account?

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.

Can I still deduct unreimbursed medical expenses?

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.

Will my Medicare payroll tax increase?

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.

Will I have to pay any new taxes due to the Affordable Care Act?

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:

  • Net investment income – gross investment income less investment expenses – for the taxable year.  For purposes of this surtax, investment income includes interest, dividends, capital gains, annuities, rents and royalties. Or,
  • The excess, if any, of modified adjusted gross income (MAGI)  over the annual threshold amount — $200,000 per year for individuals or $250,000 for married couples.

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.

How does the Affordable Care Act affect trusts and estates?

For trusts and estates, the 3.8% surtax will be imposed on the lesser of:
  • Undistributed net investment income for the year. or,
  • Any AGI for the year over the highest trust income tax bracket for the year ($12,150 in 2014). So, if a trust earns $22,150 in AGI for the year, with no undistributed net investment income, the tax will apply to $10,000, which is the AGI less the threshold amount.

If I am a high-income earner, will the Affordable Care Act 3.8 % surtax affect my retirement investments?

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:

  • Tax-exempt and tax-deferred nonqualified vehicles like municipal bonds
  • Tax-deferred nonqualified annuities
  • Life insurance
  • Nonqualified deferred compensation.
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

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