Is Obamacare Negatively Impacting Your Tax Bill?

Allison Kade
Posted

We’ve all heard about the Affordable Care Act—otherwise known as Obamacare—for years at this point.

Passed as a law in 2010, some of the changes are finally starting to take effect, some are yet to come—and there are a lot of questions about both.

Whether you’re a fan, a critic or just uncertain about what Obamacare will mean for you, you should be aware that one sweep of changes took effect at the beginning of 2013, and it will start to impact your taxes.

We spoke to Thomas Nice, CPA, a partner in the national tax office at CohnReznick who’s done extensive research on the impact of Obamacare, as well as Samantha Vient, a LearnVest Planning Services certified financial planner, for the inside scoop.

From increased tax rates to changes in healthcare deductions, we break down what you need to know.

1. Medicare Tax Increase for High Earners

As of the new year, high earners face a 0.9% increase in payroll taxes (officially, the Medicare hospital tax). Anyone making a gross income of $200,000 or more will have that extra chunk taken directly from their paychecks.

This tax also applies to couples who jointly make $250,000 or more. Nice points out: “If a married couple filing jointly was making $150,000 a person [for a total of $300,000], an employer wouldn’t withhold the extra tax from payroll because they wouldn’t know the spouse’s income or that the couple was going to be over the threshold.” So, if the 0.9% wasn’t already withheld through payroll, that couple would have to pay the extra chunk at tax time.

obamacare

How will this affect you? Those whose incomes put them above the threshold will pay this tax on the difference. So if you’re an individual who makes $225,000 a year, you’ll pay the extra 0.9% tax on only $25,000 of your earnings.

Vient notes that this extra tax could have a bigger impact on people living in expensive cities, where higher salaries don’t get you as far: “If you live in a place like NYC or San Francisco, that’s where you’ll feel the extra squeeze.”

2. Increased Taxes on Investment Income

For the tax year 2013 (which we’ll pay for in April 2014), high earners face an additional 3.8% tax on investment income. This applies to people making above $200,000 individually or $250,000 as a married couple filing jointly, but unlike the payroll tax we mentioned above, this tax is based on modified adjusted gross income (AGI).

To recap, the 0.9% payroll tax is based on how much you make in total, whereas this investment tax looks at how much you make after adjusting for state taxes and additional deductions you take. Effectively, this means that the income threshold for this tax is a bit higher than for the other tax hike.

RELATED: How to Do Your Taxes if You Have Investments

  • Lynn Hoffman

    here is a copy of the Schedule A for 2012 on the irs.gov website:

    http://www.irs.gov/pub/irs-pdf/f1040sa.pdf

    Note the % shown where it explains what one is allowed to deduct for medical expenses in the first section.

  • cpaynter

    The author’s suggestion under the caption “Concerned about the FSA cap?” is ridiculous. I have a fully funded emergency fund which can cover me for any expenses not covered by medical insurance. That’s not the point at all. I use an FSA to reduce my tax burden on medical costs.

    In previous years, I’ve contributed $5,000 per year to my FSA, and used every cent. With the $2,500 limit imposed by Obamacare, my family now blows through my entire annual allotment by June.

    Thus, the only impact so far of the “affordable” care act to me is an additional $750 per year tax burden. So where does the “affordable” part of the “Affordable Care Act” come in?