Andy Powers-A Professional who cares..About YOU!
The Affordable Care Act and how it affects your taxes
AFFORDABLE CARE ACT TAX "PENALTY" ..A SLAP
ON THE WRIST OR A KICK IN THE .......YOU TELL ME!
Although I could write endlessly regarding the Patient Protection and Affordable Care Act (a/k/a ObamaCare or the Affordable Care Act (“ACA”) my intention is only to focus on how it may affect you from an income tax perspective.
BEGINNING 2014 YOUR HEALTH INSURANCE PROVIDER WILL PROVIDE YOU WITH A FORM 1095 THAT PROVIDES INFORMATION CONCERNING THE MONTHS IN WHICH COVERAGE WAS IN EFFECT, YOUR POLICY NUMBER AND OTHER INFORMATION THAT IS NEEDED TO PREPARE YOUR INDIVIDUAL INCOME TAX RETURNS. IT IS IMPERATIVE THAT YOU PROVIDE THIS FORM TO YOUR INCOME TAX RETURN PREPARER. IF YOU DO NOT HAVE HEALTH INSURANCE FOR THE ENTIRE YEAR 2014 AND FUTURE YEARS, YOU WILL BE SUBJECT TO AN ADDITIONAL TAX CHARGE UNLESS YOU QUALIFY FOR ONE OF THE ALLOWABLE HARDSHIP EXCEPTIONS.
DON'T HAVE INSURANCE? READ THIS AND DIG DEEP! Even the IRS is confused about the Affordable Health Care Act. An agent just told me she attended a training seminar this week and that the " penalty" for not having health insurance for 2014 is only a "slap on the wrist". Well those without coverage in 2014 and not exempt can pay thousands in penalty tax. This is because the " penalty" is the GREATER of 1% of you HOUSEHOLD Modified Gross Income (MAGI) less the minimum filing threshold (about $10,000 for a single person) or $95 per person. So an uninsured individual with $110,000 in MAGI ( before deductions) will pay a $1,000 penalty. More than a slap on the wrist. But what if you like to go to the casino and have total winnings of $30,000 but you put it all back and lose a net $10,000. Well the penalty goes up an extra $300 (1% of $30,000) even though you lost it all because gambling losses are an itemized deduction not a subtraction from Gross Income. sounds unfair to me. Oh by the way, the penalty tax rate increases to 2.5% for this year, 2015 and for those who do have coverage their premiums are increasing along with copayments, deductibles plus the actual cost of health care from doctors, drugs and diagnostic tests.
What is MAGI? This is the total of your gross income from all sources less certain allowable subtractions from gross income, which is Adjusted Gross Income (AGI) but wait! There's more! It is modified by adding back certain adjustments and of particular impact to U.S. Expatriates is the amount subtracted for those who qualify for the Foreign Earned Income Exclusion (qualifying Expatriates). NOW HERE IS THE QUAGMIRE! Although Internal Revenue Code Section 5000A(f)(4) provides that the Minimum Essential Coverage (MEC) test is met (thus the penalty tax is NOT APPLICABLE) if either an American is either a bonafide resident of a foreign country for a period that includes an entire calendar year OR if they are physically present for a period of 330 out of a consecutive 365 day period (Physical Presence Test)-both as defined by Code Section 911-, there are multiple possibilities where an American working overseas can fall into the trap of not meeting this or other exceptions for the year in which the penalty tax applies. For example, what if it is the year of expatriation or the year of return and therefore the Bonafide Residency or Physical Presence Test cannot be met FOR THE ENTIRE CALENDAR YEAR? This is not addressed anywhere in the Code or Regs. Or what if the individual does qualify but chooses to elect out of IRC Section 911 foreign earned income exclusion. Although technically the U.S. taxpayer may qualify for the MEI exception, there is nowhere on the tax return, including the Form 8965 Exception form, where one can claim this exception. Accordingly, our only proposed solution is to check the box on line 61 of Form 1040 and attach a statement to the tax return explaining that although the taxpayer did qualify for the MEI ex eption as a result of meeting the IRC Section 911 qualifications, that an election was made to revoke the election and instead utilize foreign tax credits. However, I now refer you back to our recent discussion with the IRS repreentative who attended the ACA training seminar who admitted that it was condensed to the point that it did not cover all possibilities or provisions and that it was in some respects inaccurate. This is going to be a BIG problem for Americans working and living overseas who find their MEI health coverage interrupted.
One thing that deeply troubles me is as to why MAGI is used to calculate the penalty instead of AGI with reference to the foreign earned income exclusion. Could it be that they have in fact considered that there will be many taxpayers who do qualify for the exclusion as regards calculating AGI however don't qualify DURING THE CALENDAR YEAR FOR WHICH THE RETURN IS FILED. Scary thought.
For a further comprehensive review of the tax ramifications of Patient Protection and Affordable Care Act as it pertains to U.S. Expatriates and Foreign Nationals present in the United States I suggest reading this publication by the prominent tax law firm of Baker and McKenzie
Expatriate Coverage under Health Care Reform
Expected to cost in excess of 1 Trillion dollars over the next decade, the funding for this federal program will be partially offset (to the extent of an estimated $400 Billion) by reductions in Medicare as well as tax penalties imposed on individuals and large businesses who fail to comply with the law as well as increases in social security and income taxes for persons deemed to be in a higher income category. Supreme Court decisions, although having ruled that the “mandate” was not unconstitutional nor were the penalties, interestingly enough ruled that the fines and penalties are in fact “taxes” by nature. It will be interesting to see if the IRS challenges anyone who taxes an income tax deduction for these fines that are now determined to be taxes.
Some of the tax ramifications of this new law are as follows:
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The penalty that is presently imposed for making non-allowable purchases from Health Savings Accounts (“HSAs”) will increase to 20% beginning in 2014.
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The amount of money that an employer may contribute to an employee’s Flexible Spending Account will now be capped at $2,500 annually.
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There will also be an additional 3.8% investment income tax applied to singles earning over $200k and couples earning over $250k. Homeowners will still enjoy a $250.000 capital gains tax exclusion ($500,000 Married filing joint) but gains in excess of these amounts will be taxed at 18.5 percent unless they are subject to the 5% increase for earners over $400,000 ($450,000 MFJ).
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Single American taxpayers who earn above $200,000 ($250,000 MFJ) are now also paying an additional Medicaid tax up from 1.45% to 2.35%.
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· A non tax penalty will be seen by those who are smokers as well as those who live in high cost of living areas or older Americans. The Court has ruled that discrimination by insurers will be allowed to continue but the increases will be capped. For example, older insured persons cannot be charged more than three times that which would be charged younger persons in the same category. Sounds like double talk to me.
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· Large employers with 50 or more employees, beginning January 1, 2015 are mandated to insure all full time employees or be required to pay a $2,000 annual fine.
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· Certain credits are available to small business that offer health care coverage and subsidies are available to lower income workers.
All in all the ACA is a complicated comprehensive piece of legislation which obviously few (if anyone) in Congress understood when it was passed and with all the recent changes will take a team of experts who specialize in the ACA to understand the multiple provisions.