Affordable Care Act & Your Taxes

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By Alan Kalman

Now that the Affordable Care Act is a reality for all Americans, it is time to look at how this law will affect people’s taxes.

Let’s look at the Medicare tax first.

This is a tax that is withheld from every employee’s pay in order to fund Medicare. The current tax is 2.9%. The employee and the employer each pay 1.45% of wages. If you are self-employed, you must pay the whole 2.9% by yourself. Starting in 2013, certain higher compensated individuals will have to pay an additional .9%. This additional amount will be withheld from the pay of employees or will be paid by the self-employed. This extra .9% will only be assessed on the amount of employment income that exceeds $200,000 if you are unmarried, $250,000 on a combined joint return or $125,000 if you file a married separate return.

AARP_FOUNDATION_LOGOAnother change to the Medicare tax may affect certain individuals who have net investment income and their Adjusted Gross Income (AGI) (2011 Form 1040 Line 37) exceeds the same levels identified in the previous paragraph. Net investment income is defined as interest, dividends, royalties, annuities, rents, income from passive business activities, income from trading in financial instruments or commodities, and gains from assets held for investment like stock and other securities. There will be a Medicare Contribution tax of 3.8% only if your AGI exceeds the specified levels. The tax will only be applied to the lesser of your net investment income or the amount of AGI that exceeds the income levels identified above.

Itemized Medical Deductions

Also as of this year, your ability to deduct medical expenses if you itemize deductions, will become harder. In the past, you could only deduct expenses that exceed 7.5% of AGI. In 2013 the threshold went up to 10% of AGI. However, if you or a spouse on a joint return attain the age of 65 by year-end 2013, this change will not go into effect until 2017.

Employer Flexible Spending Accounts (FSA)

Many employers provide the ability for their employees to contribute, via withholding, pre-tax dollars to a fund that can be used to pay medical expenses in the year. Effectively, you are paying for medical expenses with untaxed dollars. The maximum amount you can contribute is up to the employer. Starting in 2013, employees will only be able to contribute a maximum of $2500 to these plans.

[Photo by 401(K) 2013]

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