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.
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.