Affordable Care Act

Beginning in 2014, as part of the Patient Protection and Affordable Health Care Acts all U.S. persons, with certain exception, must have minimal essential health care coverage or face a tax penalty.

Recognizing this requirement could present a serious financial problem for lower-income individuals and families who do not have employer-provided coverage or other forms of insurance, Congress included a tax credit in the law to help them pay for their insurance.

Those with household income at 100% of the poverty level get the largest credit, and the credit is reduced for higher incomes and completely phased out when the income reaches 400% of the poverty level. You might be wondering why those with income under 100% of the poverty level do not qualify for the credit; they qualify for Medicaid.

The Affordable Care Act requires certain employers with at least 50 full-time employees (or equivalents) to offer health insurance coverage to its full-time employees (and their dependents) that meets certain minimum standards set by the Affordable Care Act or to make a payment called the Employer Shared Responsibility Payment (ESRP).  Some large businesses that don’t offer coverage meeting certain standards may have to make a shared responsibility payment in 2015. If you have fewer than 50 full-time equivalent (FTE) employees, you are not subject to the ESRP part of the law. You may use the Small Business Health Option Program (SHOP) to offer coverage for your employees. As of January 1, 2015 if you have 50 or more FTEs you may have to make an ESRP if at least 1 of your full-time employees gets lower costs on their monthly premiums when buying insurance in the Marketplace. The amount of the annual ESRP is based partly on whether or not you offer insurance. If you don’t offer insurance, the annual payment is $2,000 per full-time employee (excluding the first 30 employees). If you do offer insurance, but the insurance doesn’t meet the minimum requirements, the annual payment is $3,000 per full-time employee who qualifies for premium savings in the Marketplace. Unlike employer contributions to employee premiums, the ESRP is NOT tax deductible.

Small employers get a tax credit for providing a health insurance plan. Credit can be as much as 35% of the premiums paid. A small employer is one with no more than 25 full-time equivalent employees (FTE) with average wages less than $50,000. Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer are not treated as employees for purposes of the small employer health insurance credit. Seasonal workers of an employer are not taken into account in determining the FTE employees and average annual wages of the employees unless the worker works for the employer more than 120 days during the tax year. The tax law provides a credit for small business employers who pay the health insurance premiums for their workers. This credit can be as much as 35% (25% for tax-exempt organizations) of the insurance premiums paid by the employer in 2013.

Beginning in 2014, the credit percentage increases to 50% (35% for tax-exempt organizations), and claiming the credit is limited to two consecutive years, but if the credit was claimed for any of years 2010 through 2013, those years aren’t counted for the two-year limit. In addition, for 2014 and later years, the insurance must be purchased through a state exchange, and the coverage must be uniform and not less than 50% of the premium cost.

To qualify for the credit, the employer can’t have more than 25 full-time equivalent employees, and the average wage of the employees cannot exceed $50,000 for the year. The 25 full-time equivalent employee limit is computed by taking into account both full-time and part-time employees for the year using a formula.

The credit is in lieu of taking a business deduction for the employer-paid premiums used in computing the credit. It is also part of the general business credit, which may exceed the amount of the business’ income tax, and any unused credit in the current year can be carried back one year and then forward until used up but no longer than 20 years.

Beginning Oct. 1, any business with at least one employee and $500,000 in annual revenue must notify all employees by letter about the Affordable Care Act’s health care exchanges. The requirement applies to any business regulated under the Fair Labor Standards Act (FLSA), regardless of size. Going forward, letters are to be distributed to any new hires within 14 days of their starting date, according to the Department of Labor.

As part of the Affordable Care Act, a new tax kicks in this year. The official name of this tax is the Unearned Income Medicare Contribution Tax, and even though the name implies it is a contribution, don’t get the idea that it is voluntary or that you can deduct it as a charitable contribution. It is actually a surtax levied on the net investment income of taxpayers in the higher income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, stocks, or other investments.

The surtax is 3.8% on whichever is less: your net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold based on your filing status. Net investment income is your investment income reduced by investment expenses; MAGI is your regular AGI increased by income excluded for working out of the country.

The filing status threshold amounts are:

       $250,000 for married taxpayers filing jointly and surviving spouses.

       $125,000 for married taxpayers filing separately.

                   $200,000 for single and head-of-household filers.

2013 will hold some unpleasant tax surprises for many taxpayers simply because of the increased long-term capital gains tax rates, the ordinary income tax rates, and the imposition of two new taxes as part of the Affordable Care Act, including a new 3.8% surtax on net investment income and an additional 0.9% payroll and self-employed health insurance tax.

Other factors can also have an impact on the results of your tax return. These include life events such as marriage, birth, or adoption of a child; divorce or separation; the death of a spouse; a new job; a bonus; or a spouse going to work.

You may have sold a business, real estate, stocks, or other assets that will produce a one-time increase in income.

So, if you have a substantial increase in tax as the result of any of the above or other events, it may be wise to review your withholding and/or estimated tax payments to ensure you have set aside funds for the increase in taxes and have paid in enough in advance to avoid or minimize an underpayment penalty.

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