The Affordable Care Act, colloquially known as Obamacare, completely changed how people get health care. With a big expansion of health insurance through mandatory coverage requirements, tens of millions of uninsured Americans will find themselves needing to get enrolled.
Yet the impact of Obamacare goes beyond the health care industry. New tax provisions associated with the Affordable Care Act have gone into effect this year, and they could have a big impact on your taxes both in 2013 and in future years.
What Obamacare did to your taxes
To find out more about exactly what tax provisions lawmakers embedded into the broader Obamacare legislation, the first resource I turned to was the Fool's Motley Fool ONE Tax Center. Once you get your copy, you'll find on page five of our exclusive 2013 tax report that Obamacare made several new tax-related changes that will have an impact on taxpayers of all income levels.
Perhaps the biggest change in the law expanded the tax that workers currently pay for Medicare to cover both higher amounts and different types of income. Until this year, workers paid 1.45% of their wages in Medicare withholding taxes, with employers paying another 1.45% out of their own pockets. Self-employed individuals paid the combined 2.9% on their own. Although the amount of wages subject to Medicare tax used to be limited in the same way as Social Security withholding, that changed in 1991, and by 1994, the limits on wages subject to Medicare taxation were removed entirely.
Going forward, though, Obamacare imposes additional Medicare taxes on certain individuals. In particular, two groups will be affected:
- Joint filers with wages or other work-related earnings greater than $250,000 and singles earning more than $200,000 will have to pay an additional 0.9 percentage points in Medicare tax, bringing their total to 2.35% for employees or 3.8% for self-employed workers. Employers are supposed to handle this requirement in their withholding, but for two-earner couples, that may prove impossible, as your employer will have no knowledge of what your spouse earns.
- Those with total adjusted gross incomes of more than $250,000 for joint filers, or $200,000 for singles, will have Medicare taxes imposed on their investment income as well. On whatever amount of investments exceeds the $250,000 gross-income level, you'll have to pay the full 3.8% surtax yourself.
The net effect on high-income earners will be to bring total top tax brackets to 43.4% -- the 39.6% regular tax amount plus the 3.8% Medicare tax.
Hitting lower-income workers
Those who earn less than the $200,000 and $250,000 thresholds shouldn't assume that their taxes will be unaffected by Obamacare. New limitations on flexible spending arrangements will hit taxpayers of all income levels, limiting the amount you can set aside tax-free in a flex plan to $2,500 per year. Previously, there was no technical upper limit, although most employers imposed a $5,000 maximum. But for those who have high levels of predictable medical expenses, the forced reduction in flex-plan use could cost you hundreds of dollars in extra income, Social Security withholding, and Medicare withholding taxes.
Moreover, those who rely on deducting medical expenses won't be able to get as big a tax benefit from them. Obamacare raised the floor on itemized medical expenses from 7.5% of gross income to 10%. That may not sound like much, but it could reduce your deduction by thousands of dollars and thereby increase your tax bill substantially.
Will you get any benefit?
The question, of course, is whether Obamacare's benefit will exceed the extra taxes you'll pay. The jury's still out on that question, but one reason to be somewhat skeptical is the extent to which health insurance stocks have risen lately. Industry giants UnitedHealth (NYSE:UNH) and Humana (NYSE:HUM) haven't seen big share-price advances, in part because of proposed cuts to Medicare Advantage plans that will affect them particularly harshly. Yet with less exposure to the Medicare Advantage market, peers Aetna (NYSE:AET) and Cigna (NYSE:CI) have risen to 52-week highs on expectations that they'll reap the benefits of greater numbers of insured people. That in turn suggests that fewer of those benefits will be left for newly covered individuals themselves.
Regardless, as you consider your taxes this year, don't forget about the new Obamacare provisions. Planning for them now could save you from a big headache down the road.
Obamacare's tax liability is just one of many complicated tax provisions you need to understand better. To get all the answers you need, be sure to check out our Motley Fool ONE Tax Center. It's an extensive report put together by Fool financial expert Robert Brokamp, and it can be yours free. With tax season winding down, this limited-time offer won't last long, so click here right now and claim this valuable tax resource today!
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.