As we draw closer to 2014, the media continues to increase their coverage on the Affordable Care Act and how this round of implementations will affect people. For the uninsured, the Affordable Care Act means that they will have to begin the process of obtaining insurance on their own or suffer a penalty for not having coverage. For businesses, it will mean that they will have to offer affordable healthcare coverage to employees starting in 2015.
Most people are aware that there will be a penalty for the uninsured, but not much else. Because many of these provisions mean changes to the tax code, as a tax preparer, you should not only be ready for the changes that will take place in 2014, but also ready to answer any questions your clients may have. Here are some highlights on the changes that will be in effect in 2014.
Individual Shared Responsibility Provision
Forty of the 500 provisions in The Affordable Care Act amend or add provision to the U.S. tax code. Most of the changes that are to be implemented in 2014 have to do with healthcare coverage (the Individual Shared Responsibility provision). This provision requires that each person either have the minimum essential coverage, qualify for an exemption, or make a payment when filing his or her federal income tax return.
Although you are not required to brief your clients on the Affordable Care Act, you should consider at least informing them of their options. Some clients may be eligible for exemption or subsidies through tax credits based on their tax return.
A key part of the ACA is the federal exchange – which allows individuals who are not insured to purchase insurance through the exchange. Through this exchange, they can shop for the best rates and policies.
Whether or not a person qualifies for subsidies is determined by defined income requirements. Individuals are only eligible if they purchase the coverage through the federal exchange system. This federal system will cross check income, job and coverage information to determine whether they qualify for a premium credit or Medicaid.
As a tax preparer, you can look at your client’s 2012 tax return and inform each client of the options they have based on income.
Subsidies will be available for families who earn as much as 400 percent of the federal poverty rate. Health insurance premiums and subsidies can be determined using the Kaiser Foundation Subsidy Calculator (below):
Enrollment in the exchanges will begin Oct. 1, and all plans purchased will go into effect the first of next year.
According to the Kaiser Foundation, exemptions will be granted for financial hardship, religious objections, American Indians, people covered by government insurance plans, those without coverage for less than three months, people who make too little to have to pay taxes and those for whom the lowest insurance plan available exceeds 8 percent of their income.
Further information on exemptions can be found here.
Employers with 50 or more employees must offer qualified and affordable health insurance plans for their employees. If the employer does not meet the requirements, they will have to pay an Employer Shared Responsibility Payment. The payment is scheduled to begin in 2015.
According to healthcare.gov, “If an employee’s share of the premium costs for employee-only coverage is more than 9.5% of their yearly household income, the coverage is not considered affordable.”
You can find out more about the Employer Shared Responsibility Payment here.
Employers will also have to report the cost of employee coverage under an employer-sponsored group health plan on their employee’s W-2 (Box 12). According to IRS.gov, some employers may be eligible for a transition relief for tax year 2012 and beyond until the IRS issues final guidance.
As a side note, individuals who are self-employed can deduct the cost of their policies.
If you contribute to a pre-tax health flexible-spending account, you will be capped at $2,500. For married couples, each spouse can open their own FSA with their respective employers, which would allow them to put aside a total of $5,000.
High Income/High Investment Income
Individuals who earn over $200,000 will pay an additional 0.9 percent Medicare payroll tax on all income over $200,000. For couples that number is $250,000. This is on top of the previous Medicare tax of 1.45 percent.
Individuals or couples who aren’t having the extra 0.9 percent taken out of their paychecks should consider paying extra taxes quarterly to the IRS, to avoid owing extra penalties when they file their 2013 taxes.
This is just the tip of the iceberg. As a tax preparer, it is crucial for you to study the new tax codes and be competent and compliant in the changes that will be implemented in 2014. For more information check both irs.gov and healthcare.gov.