By Anthony Lopez
As tax time approaches, the Affordable Care Act, aka Obamacare, has left many small business owners and self-employed Americans with burning questions about how to handle their 2013 taxes and prepare for 2014, too. Here are six of the most pressing:
Q: Can I still deduct medical expenses from my taxes?
A: New limits on medical expense deductions may impact your filing. Fewer people will be able to deduct medical expenses from their 2013 federal taxes. Until 2012, you could itemize and deduct medical expenses in excess of 7.5% of your adjusted gross income. As a result of health reform, that threshold has been raised to 10% for the 2013 tax year. You can refer to IRS Publication 502 for more information about qualifying medical expenses, but these may include monthly premiums you pay for coverage (including some Medicare premiums), copayments, deductibles, dental expenses, and costs for some services not covered by your insurance plan. You may even deduct mileage accrued while driving to and from regular appointments. This deduction isn’t for everyone, but if you (or one of your dependents) were seriously ill or hospitalized last year, you may still qualify.
Q: Can I get tax credits for providing employees with health insurance coverage?
A: If you’re a small business owner providing group health insurance coverage for your workers, there may be special tax credits available to you. If you have 25 or fewer employees with average annual wages of less than $50,000, you may be eligible for a special tax credit of up to 35% of the amount you contribute toward employee insurance premiums. Starting in the 2014 tax year, that credit will increase to 50%. Keep in mind that in order to qualify for the credit you must have paid at least fifty percent of your employees’ total monthly premiums.
Q: What new taxes am I looking at if I make over $200,000 a year?
A: Big earners should look for new and increased Medicare taxes. When filing their federal taxes for 2013, joint-earners with incomes over $250,000 per year and single earners with incomes over $200,000 will face new and increased taxes as a result of the Affordable Care Act. There are two in particular to be aware of: First, the Medicare tax on earned income increases from 1.45% to 2.35% for income in excess of the $250,000/$200,000 limit. Second, big earners may face a new Medicare tax of 3.8% on interest, dividends, capital gains and rent and royalty income.
Q: What do I need to know about subsidies?
A: Anyone who estimates their income, especially small business owners and the self-employed, should be aware of the 2014 tax year implications of health insurance subsidies. Consider this a tip for your 2014 tax-year return. If your modified adjusted gross income for 2014 falls below 400% of the federal poverty level (about $46,000 for a single person or $94,000 for a family of four), you may qualify for government health insurance subsidies. This is great if you need to buy coverage on your own. However, keep in mind that these subsidies are based on your estimated income for 2014. If you earn more than expected in 2014, you may need to adjust your subsidies mid-year or else repay all or part of your subsidies when you complete your 2014 federal tax return.
Q: Should I just forgo insurance?
A: Look out for the 2014 tax penalty for going uninsured. Here’s another forward-looking tip. In 2014 most Americans will be required to have health insurance in one form or another. If you don’t have employer-based coverage and are not enrolled in Medicare or Medicaid, you may be required to purchase coverage on your own. If you don’t – and if you’re uninsured for more than three consecutive months in 2014 – you may trigger a tax penalty on your 2014 federal tax return. The penalty, which will be applied on your 2014 federal tax return, is $95 or 1% of your income, whichever is great. Penalties will increase in succeeding years. In order to avoid the penalty for 2014, be sure to enroll in coverage before the end of the nationwide open enrollment period, which runs through March 31, 2014. Enroll in a 2014 plan through a licensed online agent like eHealth or through your state’s government health insurance exchange.
Q: Any hidden or less publicized penalties I should know?
A: Enrolling in a health insurance plan on February 16, 2014 or later may impact your 2014 return. Applying for a plan on this date or later means that a consumer’s coverage will not likely come into effect earlier than April 1, 2014, which is outside of the open enrollment period. This might have made the enrollee subject to a tax penalty if he or she had been uninsured since January 1 (that is, for three consecutive months). However, the federal government has said that consumers who enroll during open enrollment (that is, by March 31, 2014) will not need to pay a tax penalty. In order to avoid paying the tax penalty, these consumers should know that they may be required to claim a special hardship exemption when filing their 2014 federal tax returns.
Editor’s Note: Anthony Lopez is a licensed health insurance broker from eHealth. He is not from an accountancy firm nor is he a tax advisor. Please refer to your accountant to understand how the tips above may apply to you and your 2013 federal taxes.