Money Matters: What Obamacare has in store for 2014

James C. DeRidder, The Daily Record Newswire

Now that most of us have filed our 2012 tax returns, the last thing we want to think about is taxes, but it is never too early to begin thinking about tax law changes and how they will affect us in the current year and beyond.

New taxes for 2013
As a result of the last minute agreement to avoid the so called fiscal cliff, the wealthier taxpayers were hit with some tax increases.

A new top tax rate of 39.6 percent was added for individuals whose taxable income exceeds $400,000 ($450,000 for married taxpayers and $425,000 for Head of Household). Also for taxpayers that are subject to the 39.6 percent rate, the maximum rate on capital gains and qualified dividends will increase to 20 percent.

To help pay for Obamacare, there were a couple of new taxes added that became effective starting in 2013.

A new 0.9 percent additional Medicare tax on earned income for individuals whose adjusted gross income (AGI) exceeds $200,000 ($250,000 for married taxpayers).

A new 3.8 percent tax was levied on unearned income, which is determined by the lesser of net investment income or the amount by which AGI exceeds $200,000 ($250,000 for married taxpayers). Net investment income includes items such as interest, dividends, rents, royalties, annuities, capital gains and passive business income.

For taxpayers that are subject to these new taxes, it could potentially increase their maximum rate from 36 percent to 43.4 percent.

While not actually tax increases, there were certain tax law changes that affect deductions, which may result in a tax increase.

The personal exemption phaseout has been reinstated for taxpayers whose AGI exceeds $250,000 ($300,000 married taxpayers and $250,000 for Head of Household). Basically you will lose 2 percent of your personal exemptions for each $2,500 of AGI that exceeds those thresholds.

The 3 percent reduction of most itemized deductions has also been reinstated for the same thresholds as the personal exemption phaseout. The 3 percent reduction is determined by the amount that AGI exceeds these thresholds with a maximum reduction of 80 percent

Patient Protection and Affordable Care Act

Beginning in 2014 the next phase of the Patient Protection and Affordable Care Act (Obamacare) will be implemented. Called the individual shared responsibility provision of the act, it calls for each individual to have minimum essential health coverage for each month, or qualify for an exemption; otherwise they will be required to make a payment when filing their federal income tax return.

The provision applies to individuals of all ages, including children. A taxpayer who can claim a dependent for federal income tax purposes is responsible for making the payment if the dependent does not have coverage or an exemption.

Minimum essential coverage includes at a minimum all of the following:

• Employer-sponsored coverage (including COBRA and retiree coverage);

• Coverage purchased in the individual market;

• Medicare coverage (including Medicare Advantage);

• Medicaid coverage;

• Children’s Health Insurance Program coverage;

• Certain types of Veterans health coverage; and

• TRICARE.

Minimum essential coverage does not include specialized coverage, such as coverage only for vision care or dental care, workers’ compensation, disability policies, or coverage only for a specific disease or condition. The Department of Health and Human Services has authority to designate additional types of coverage as minimum essential coverage.

The statutory exemptions from the requirement to obtain minimum essential coverage include:

• Religious conscience: You are a member of a religious sect that is recognized as conscientiously opposed to accepting any insurance benefits.

• Health care sharing ministry: You are a member of a recognized health care sharing ministry.

• Indian tribes: You are a member of a federally recognized Indian tribe.

• No filing requirement: Your household income is below the minimum threshold for filing a tax return.

• Short coverage gap: You went without coverage for less than three consecutive months during the year. If an individual has two short coverage gaps during a year, the short coverage gap exemption only applies to the
first, or earlier, gap.

• Hardship: A Health Insurance Marketplace, also known as an Affordable Insurance Exchange, has certified that you have suffered a hardship that makes you unable to obtain coverage.

• Unaffordable coverage options: You can’t afford coverage because the minimum amount you must pay for the premiums is more than eight percent of your household income.

• Incarceration: You are in a jail, prison or similar penal institution or correctional facility after the disposition of charges against you.

• Not lawfully present: You are not a U.S. citizen, a U.S. national, nor an alien lawfully present in the U.S.

Most individuals in the United States have health coverage today that will count as minimum essential coverage and will not need to do anything more than continue the coverage that they have. If an employee enrolls
in employer-sponsored coverage for himself and his family, the employee and all of the covered family members have minimum essential coverage.

You, your spouse and your dependent children do not have to be covered under the same policy or plan. However, you, your spouse and each dependent child for whom you may claim a personal exemption on your federal income tax return must have minimum essential coverage or qualify for an exemption, or you will owe a payment when you file.

For those who will not have coverage or who want to explore whether more affordable options are available, Health Insurance Marketplaces will open for every state and the District of Columbia in October 2013. These Health Insurance Marketplaces will help qualified individuals find minimum essential coverage that fits their budget and potentially financial assistance to help with the costs of coverage beginning in 2014.

The Health Insurance Marketplace will also be able to assess whether applicants are eligible for Medicaid or the Children’s Health Insurance Program. For those who become eligible for Medicare during 2013, enrolling for Medicare will also ensure that you have minimum essential coverage for 2014.

For those seeking an exemption, a Health Insurance Marketplace will be able to provide certificates of exemption for many of the exemption categories. Individuals will also be able to claim exemptions for 2014 when they file their federal income tax returns in 2015. Individuals who are not required to file a federal income tax return are automatically exempt and do not need to take any further action to secure an exemption.

Since the individual shared responsibility provision doesn’t goes into effect until 2014, you will not have to account for coverage or exemptions or make any payments until you file your 2014 tax return in 2015. However, if you won’t have coverage beginning in 2014, be prepared to obtain coverage or consider your eligibility for an exemption before the end of the year.

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James C. DeRidder, CPA, is a senior manager with Mengel, Metzger, Barr & Co. LLP. He can be reached at Jderidder@mmb-co.com