Among the changes brought by the Affordable Care Act is the link that now exists between healthcare and your taxes. Many people will be eligible for a new kind of tax credit, and if you are required to have health insurance and you don’t have coverage, you will have to pay a penalty fee on your 2014 tax return. Obamacare also brings tax increases for certain people, including a Medicare tax increase for high earners and increased taxes on net investment income (NII). Here’s a summary of what you need to know about Obamacare and your taxes.

Premium Tax Credits

Many people will be eligible for the Premium Tax Credit, a tax credit that can lower your monthly health insurance premiums. To receive the credit, you must:

Family Size 100% FPL 400% FPL
1 $11,490 $45,960
2 $15,510 $62,040
3 $19,530 $78,120
4 $23,550 $94,200
5 $27,570 $110,280
6 $31,590 $126,360
7 $35,610 $142,440
8 $39,630 $158,520

If you are eligible for the Premium Tax Credit, you can decide to have some or all of the estimated credit paid in advance to your insurance company, effectively lowering what you pay each month towards your health insurance premiums. Alternatively, you can wait to receive the credit when you file your tax return (for example, when you file your 2014 return in 2015). Either way, the credit becomes part of your tax return. Christopher Smith, a licensed insurance agent with WNC Health Insurance, explains: “Your credit will always be reconciled when you file for the tax year, whether you take your credit up front as an advanceable credit or if you take no credit at all in advance.” The Marketplace will send you a statement showing your premiums and advance credit payments by Jan. 31 after the year for which you received the credit.

If you choose to have the credit paid in advance, you will subtract the total advance payments you received for the year from the amount of the Premium Tax Credit that you calculate on your tax return. If your advance payments are less than the Premium Tax Credit computed on your return, the difference will increase your refund or lower the amount of tax you owe. You will have a smaller refund or a balance due if your advance payments were greater than the amount of the computed credit. The amount you would have to repay is capped if your income is less than 400% of the FPL. For example, a family of four with an income between 200-300% of the FPL would not have to repay more than $1,500

Even if you have not filed a tax return in previous years, you can still qualify for a premium tax credit, but you will have to file a return for any year in which you receive the credit to qualify for the credit in future years. According to Fran Brooks of Brooks CPA, PLLC, “You will file your current year return to reconcile the credit. If you don’t file a return with the reconciliation, you will not get the credit again the next year.”

Individual Shared Responsibility Payments

Starting in 2014, the individual shared responsibility provision requires each individual, including children, to have minimum essential health coverage, qualify for an exemption or make a payment when filing the year’s tax return (the adult or married couple claiming a child as a dependent would be responsible for the payment). “There will be a penalty for not having insurance coverage, and the penalty will be based on a taxpayer’s income,” explains Brooks. There will be a place on your tax return to confirm that you had health insurance coverage for the year, starting with your 2014 return.

If you don’t have coverage in 2014, you will have to pay a penalty of 1% of your income or $95 per person ($47.50 for each child), whichever is greater. In 2016, the penalty increases to 2.5% of income or $695 per person, whichever is greater. The IRS is prohibited from using liens or levies to collect any payment that you owe related to the individual shared responsibility payment; however, if you owe and don’t pay the fee, the IRS can offset that amount against any tax refund you may be due. Since all of this goes into effect on Jan. 1, 2014, you will not have to account for coverage or exemptions, or pay the penalty, until you file your 2014 return in 2015.

Medicare Tax Increase for High Earners

Under Obamacare, a new Additional Medicare Tax went into effect beginning in 2013. The tax represents a 0.9% tax increase that applies to wages (including non-cash wages such as fringe benefits and tips), Railroad Retirement Tax Act compensation and self-employment income that exceeds thresholds sets by the IRS ($250,000 for taxpayers who are married filing jointly; $125,000 for taxpayers who are married filing separately); and $200,000 for all other taxpayers (single, head of household, or qualifying widow(er) with dependent child). To clarify, the 0.9% Additional Medicare Tax applies only to income that exceeds the threshold for the individual’s filing status. For example, a single filer whose income is $220,000 would pay the 0.9% tax based on $20,000 – the amount of income that exceeds the $200,000 threshold.

If you must pay the Additional Medicare Tax, you will calculate your liability on your individual income tax return. Your employer must withhold Additional Medicare Tax on any wages paid to you in excess of $200,000 in a calendar year – even if you are married, filing jointly and won’t meet the $250,000 threshold. You will report the amount withheld on your tax return and it will be applied against all taxes shown on the return.  

Increased Taxes on Investment Income

On Jan. 1, 2013, a new 3.8% Medicare tax went into effect; this applies to the NII of certain individuals, estates and trusts. NII includes but is not limited to:

  • Capital gains
  • Dividends
  • Gain from the sale of a primary residence in excess of exempted amounts (the first $250,000 for single individuals or $500,000 for a married couple)
  • Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence)
  • Gross income from a trade or business involving passive activities
  • Income from businesses involved in trading of financial instruments or commodities
  • Interest
  • Net gains from the sale of stocks, bonds and mutual funds
  • Non-qualified annuities
  • Royalties and rental income

Like the 0.9% Additional Medicare Tax, the 3.8% tax on NII is assessed on investment income that exceeds specific thresholds: $250,000 for taxpayers who are married, filing jointly; $125,000 for taxpayers who are married, filing separately; and $200,000 for all other taxpayers (single, head of household, or qualifying widow(er) with dependent child). Taxpayers determine any applicable tax on the new IRS Form 8960, Net Investment Income Tax – Individuals, Estates and Trusts.

The tax applies to the lesser of the total NII or the amount by which adjusted gross income (AGI) exceeds the threshold for your filing status. For example, Mary is a single taxpayer whose AGI is $220,000, based on $170,000 in wages, $20,000 in retirement income, and $30,000 in NII. Mary’s income exceeds the threshold by $20,000 ($220,000 income - $200,000 threshold for single filers). Since her excess income ($20,000) is lower than her NII ($30,000), the 3.8% Medicare tax will apply to the excess income of $20,000.

Changes to Medical Expense Deductions

You can claim deductions on your tax return for medical and dental expenses that are not covered by your health insurance. Prior to 2013, you could claim expenses that exceeded 7.5% of your AGI; however, starting Jan. 1, 2013, you can claim only those expenses that exceed 10% of your AGI (note: if you and/or your spouse are age 65 or older, you can still use the 7.5% threshold through Dec. 31, 2016). Beginning Jan. 1, 2017 all taxpayers – regardless of age – must use the higher 10% threshold when claiming deductions for medical and dental expenses. Taxpayers use Schedule A, Itemized Deductions (Form 1040) to itemize medical and dental expenses.

The Bottom Line

There are literally dozens of new, amended or broadened tax provisions under the new healthcare legislation. The tax laws are complicated and it is recommended that you work with a qualified tax professional or Certified Public Accountant (CPA) to ensure favorable results on your annual tax return.