(i) The medical expense deduction threshold rose from 7.5 percent of adjusted gross income (AGI) to 10 percent. That’s not applicable if the taxpayer or spouse is 65. The age-based waiver expires in 2016. What that has meant for taxpayers with AGIs of $100,000 and $10,500 in medical expenses is that they could have claimed a $3,000 deduction in 2012, but only $500 last year.
The increased threshold doesn’t apply if either the taxpayer or spouse turns 65 before the end of years 2013 to 2016. The exemption is rescinded in 2017. For purposes of the Alternative Minimum Tax, medical expenses are deductible only if costs exceed 10 percent of AGI. The healthcare act doesn’t change treatment of the alternative minimum tax (AMT).
(ii) The employee portion of the Medicare tax on wages is increased by 0.9 percent on wages in excess of $250,000/$125,000/$200,000 for married people filing jointly, or separately, or singles. The so-called FICA Tax comprises a Social Security tax equal to 6.2 percent of wages up to the taxable wage base ($113,700 last year) and a Medicare tax equal to 1.45 percent of all wages. Both employers and employees are subject to FICA tax.
Under the ACA, the employee portion of the Medicare tax is increased by an additional tax of 0.9 percent on wages in excess of the threshold amounts noted above. But the additional tax is levied only when an individual’s wages pass the $200,000 mark. So an employee may be subject to extra withholding by earning more than $200,000 but not liable for the additional 0.9 percent tax because of a combined income with a spouse of less than $250,000. This person will receive a credit for the tax withheld.
(iii) Taxpayers with a modified AGI of more than $250,000/$125,000/$200,000 for married people filing jointly or separately, or singles, are subject to a 3.8 percent Medicare Contribution Tax. Last year, the ACA imposed a new 3.8 percent tax on net investment income for higher income individuals. That income includes interest, dividends, annuities, realties and rents, and is taxed if modified AGI exceeds $250,000 for joint returns, $125,000 for married couples filing separately and $200,000 for singles.
(iv) The excise tax for nonqualified payouts from a health savings account rose from 10 percent to 20 percent.
(v) Those who receive subsidy or advance credits when buying insurance from an exchange must match the advance credit to the actual credit based on the actual income to determine whether any of the advance credit must be repaid or whether entitled to additional credits and file a tax return to reconcile income and advance credits.
(vi) Insurance companies distinguish ACA coverages by ranking them according to their actuarial value—the percentage the carrier will pay before the insured must kick in. There are four coverage tiers or “metals:” platinum (highest), gold, silver and bronze. Someone covered by a platinum plan will have lower out-of-pocket costs that someone covered under a bronze plan. But the monthly premium for a platinum plan is much higher.
(vii) Self-employed taxpayers able to deduct health insurance premiums are best served by enrolling in the premium metal plans.
And just in case you just say the heck with ACA requirements and decide to skip insurance, I believe that the penalty for being uninsured in 2015 is the greater of $325 per person or two percent of household income. The maximum penalty for a family is $975. However, there are 33 separate exemptions from the penalty.
Rita Bhayani is a Certified Public Accountant and a Certified Management Accountant practicing at Pleasanton, CA and she protects the clients from the IRS. For more information log on to www.ritacpa.net.