New Final Regulations Clarify Obamacare Tax Rules

By Ken Berry, Correspondent 
 
With all the hubbub over glitches in the website providing access to health insurance coverage under the Affordable Care Act (ACA) – the 2010 law often referred to as "Obamacare" – surprisingly little attention is being paid to the tax ramifications and related aspects of this massive legislation. Notably, three provisions may have a major impact on individual taxpayers and certain businesses beginning in 2013. The IRS has just issued voluminous new final regulations clarifying some of the rules.
 
1. Net investment income tax: Under Obamacare, a 3.8 percent Medicare surtax applies to the lesser of a taxpayer's "net investment income" (NII) or the excess above the modified adjusted gross income (MAGI) thresholds of $200,000 for single filers and $250,000 for joint filers. Thus, if a single filer reports NII of $100,000 and a MAGI of $250,000 on his or her 2013 return, the surtax is equal to $1,900 (3.8 percent of excess $50,000 MAGI). This may be critical to many of your upper-income clients.
 
For a trust or estate, the surtax is equal to 3.8 percent of the lesser of the undistributed NII or excess adjusted gross income (AGI) over the dollar amount at which the highest income tax bracket applicable to the estate or trust begins. The dollar amount for 2013 returns is $11,950.
 
Much of the confusion over this Obamacare provision relates to the definition of NII. For instance, it includes capital gains and interest income, but not distributions from qualified retirement plans and IRAs. See more information on the NII tax at http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs.
 
2. Wage and self-employment income surtax: Another Medicare surtax applies to the compensation received by employees and self-employment income. It's equal to 0.9 percent of the amount exceeding earned income thresholds of $200,000 for single filers and $250,000. However, the 0.9 percent surtax doesn't apply to estates or trusts. Although this provision isn't as onerous as the NII tax, it still creates an extra tax burden for upper-income clients.
 
Under the new final regulations, employers are required to withhold the additional Medicare tax from wages exceeding $200,000, regardless of filing status or other income. Thus, if the threshold is exceeded, the additional Medicare tax must be withheld, even if the employee ultimately won't owe the tax based on joint tax return liability.
 
A self-employed client who also has employment income may reduce the applicable threshold before calculating the 0.9 percent surtax on self-employment income. For more details, visit http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax.
 
3. Health insurance provider fees: Beginning in 2014, covered entities engaged in the business of providing health insurance relating to US health risks will face an annual flat fee. The fee will be determined with respect to net premiums written after 2012. The aggregate annual flat fee will be:
  • $8 billion for 2014
  • $11.3 billion for 2015 and 2016
  • $13.9 billion for 2017
  • $14.3 billion for 2018
For this purpose, "covered entities" generally are those providing health insurance with respect to US health risks during the year in which the fee is due. However, this doesn't include governmental entities, certain nonprofits, or organizations that qualify as a "voluntary employees beneficiary association" (VEBA) if it is established by an entity other than the employer for the purpose of providing health care benefits. More information is available at http://www.irs.gov/PUP/newsroom/REG-118315-12.pdf.
 
Be prepared to field inquiries from clients on tax matters relating to Obamacare. To learn more, a good starting place is www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions-Home.
 
Related articles:
 

You may like these other stories...

As mentioned in today’s “Bramwell’s Lunch Beat” via an article from the USA Today, a new report from the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS doled out $2.8...
London Stock Exchange switches auditing to EYThe London Stock Exchange will drop PwC as its auditor and replace it with EY after completion of the audit for the year ending March 2014, Harriet Agnew of the Financial Times...
With tax season in the past, it's time to think about the tax implications of decisions your clients may be making about their homes in 2014. The rules are complicated and because of the huge amounts involved, the...

Upcoming CPE Webinars

Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.
May 1
This material focuses on the principles of accounting for non-profit organizations’ expenses. It will include discussions of functional expense categories, accounting for functional expenses and allocations of joint costs.