Despite much congressional posturing about trying to repeal the law, The Affordable Care Act, commonly referred to as ObamaCare, is already affecting taxpayers. Not all of the provisions of the law have gone into effect yet, but many kicked in starting January 1, 2013. You have most likely already seen a difference in your paycheck. Although you will not see much of a difference when you file your 2012 tax return, expect even bigger changes in the years to come.
Individuals who earn more than $200,000 per year and married couples who earn more than $250,000 per year must now pay an additional .9% on any income earned over those amounts. This raises the current 2.9% Medicare payroll tax to 3.8% on all income the goes beyond the 200k or 250k threshold. Typically, the Medicare tax is split evenly between employers and employees, but those who are self-employed have to pay the full tax themselves. Many people mistakenly believe the higher tax rate coming out of their paychecks is because of Medicare, but it is actually because of a different tax cut that expired in 2013.
Itemized Medical Deductions and Flexible Spending Account Tax Limits
As of 2013, the threshold that determined how much of their medical deductions people could deduct on their taxes jumped to 10% of their adjusted gross income. Previously, this amount was only 7.5% of taxpayers’ adjusted gross income in order to qualify. Another big change this year is that there is now a limit the amount of tax-exempt money that workers can put away for medical expenses. Although, some employers had limits, there was no federal limit until now. The new law caps the amount at $2,500 per year now. Both of these laws will create higher tax burdens for those with ongoing health problems.
Starting January 1, 2014, all United States citizens and legal residents must have health insurance or they will have to pay a tax penalty. The penalty, starting in 2014, is $95 or 1% of your household income, whichever is higher. After that, it will continue to increase through 2016 until it reaches $695 or 2.5% of household income. Future increases will go up by cost-of-living. The tax penalties will be raised gradually between 2014 – 2016.
The federal government has also created a Health Insurance Marketplace website where those who aren’t sure where to shop for individual coverage can look for coverage and an explanation of benefits.
There are a few loopholes to avoid paying the penalty, but they only apply to a small percentage of people. You can go up to three months without health insurance before you have to pay the penalty. If your income is so low that you do not file taxes or the lowest cost plan you can find is more than 8% of your income, then you will not have to pay the penalty. Prisoners in jail and Native Americans do not have to purchase health insurance.
How to Avoid the Tax Penalty
If you do not have, or cannot afford insurance through your employer, you may be eligible to apply for Medicaid. Additionally, if you are unemployed, but do not receive unemployment compensation you can apply for Medicaid as well; however, you cannot apply for Medicaid if you receive unemployment compensation. Married people may be eligible to go on their spouse’s medical plan. Many states are setting up State-Based Exchanges to help citizens find health insurance that they can afford. Can your state’s division of Health and Social Services to find out if your state is setting up an exchange. In cases where states opt out of setting up an exchange, the United States government will set-up a Federal Exchange for people to compare insurance plans.
Financing Your Healthcare Insurance
Although the government claims the exchanges will offer affordable health insurance so that Americans do not have to pay the tax penalty, the specifics of how this will work are still a bit sketchy. If you do not have enough money saved up to purchase a qualified health plan, you can consider applying for financial assistance through websites like credit loan personal loans, prosper.com or Lending Club; although those options may just add to your debt levels if you can’t pay them off right away. Alternatively, if you have good credit, you might be able to get a lower-rate personal loan from a bank like Wells Fargo.
The Affordable Care Act is one of the most sweeping healthcare reforms in United States’ history. With so many millions of Americans affected, ObamaCare has quite a few supporters and detractors. However, the fact of the matter is that President Barack Obama signed the bill into law in 2010 and changes are already taking place. The best thing you can do to stay informed of any changes that may happen and comply with the mandatory insurance requirement so that you can avoid paying a tax penalty.
Dona Collins is a graphic designer and blogger with a strong background in the finance and insurance industries. When in doubt, talk to your accountant or financial adviser about how the new healthcare laws will impact your finances.