The Affordable Care Act, known to many as Obamacare, is being phased in, and this year will see several changes to the tax code. Although it will take several years for the Affordable Care Act's implementation to be complete, there are a number of things that taxpayers need to be aware of for the 2014 tax season. Some of the biggest changes will affect people in high-earning income brackets, but there are provisions that will impact people at all income levels. The adjustments to the tax code concern Medicare, investments, health coverage for older children, and more.
Reporting expenses on the W2
The amount that employers pay for employer-sponsored group health plans must be reported on the employee's W2. Although employers have to report it, this amount does not affect an individual's tax liability. The employer's contribution to the health plan will not change your taxable income.
Deducting medical expenses
Considering the high cost of medical care for many Americans, it is important to know at what point individuals can deduct the cost of health care on their taxes. In previous years, individuals were able to deduct medical expenses if they spent 7.5% or more of their adjusted gross income on care not covered by health insurance. Under the Affordable Care Act, the threshold for deducting medical costs is now 10% of adjusted gross income. This may be a big issue for lower-income individuals, as health care costs are more likely to take up a significant amount of the income of people earning less.
Additional Medicare Tax
Effective for 2013 tax returns, there is a 0.9% increase in Medicare taxes to earners in higher income brackets. The only taxpayers who will be subject to this bump in Medicare taxes are married couples filing jointly who earn $250,000 or more, married individuals filing separately earning $125,000 or more, or non-married individuals earning $200,000 or more. Employers are responsible for withholding this tax for all employees earning more than $200,000 annually. Taxpayers will pay this 0.9% additional tax on gross income earned above the threshold amounts.
Net Investment Income Tax
The Net Investment Income Tax goes into effect for 2013 taxes (the taxes you file in 2014) on non-earned income -- that is, income from investments. The tax is based on modified adjusted gross income and levies an additional 3.8% tax on investment income for individuals who earn $200,000 or more, married individuals filing separately who earn $125,000 or more, and married couples earning $250,000 or more.
Health coverage for older children
In most cases, coverage for an employee's children under 27 years of age is tax-free to the employee. This provision applies to people who are self-employed, work for an employer, or are on retiree plans. Anyone with a "cafeteria" plan can begin making pre-tax contributions to pay for this expanded benefit .
Flexible spending accounts cap
People who use flexible spending accounts may be affected by a new limit on tax-free contributions. Until recently there was no limit on how much individuals could contribute to their FSAs, but starting in the 2013 tax year, only the first $2,500 worth of contributions is tax-free. Although some plans may still permit contributions in excess of $2,500, reimbursements will have to be reported on the individual's W2 as taxable income.
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