Obamacare tax troubles popping up

Affordable Care Act tax issues
As the filing season kicked off in January, Treasury and Centers for Medicare & Medicaid Services officials warned that millions of filers could owe Affordable Care Act, or ACA, taxes.

Some filers will face penalties because they didn't get required insurance coverage. This is the individual shared responsibility tax.

Others will find they got too much government help to buy insurance and must pay it back. This is the premium tax credit, which millions used to help pay for the coverage they bought through a marketplace exchange.

While the IRS hasn't yet issued any data as to how many taxpayers are in such ACA payment predicaments, we are starting to get anecdotal reports.

Costly life changes
One California woman recently told CNN that she's using her savings to pay back the subsidy, officially known as the advance premium tax credit, that she received to buy her coverage through her state's exchange.

But, she admits, her surprise tax bill is her fault.

When she got a job after buying her policy thanks to the tax credit, she didn't let the exchange know of her income increase. Her situation is just one that was noted in Bankrate's story on the possible Obamacare tax costs that many might face.

No issues for early filers
Obviously, most of the folks filing early are not having Obamacare tax issues. The total number of refunds issued so far this year, as well as the average refund check amount, are larger than at the same time last year.

And most taxpayers won't have Obamacare tax troubles. They have health care coverage through their employers. All they have to do is check a box to that effect on their 1040 (or 1040A or 1040EZ).

But we'll keep an eye on the IRS filing season reports. The refund amounts will drop; they do so every year. Folks getting big refunds always file early, while the rest of us who get smaller refunds or owe tax are at the end of the annual filing parade.

If the refund amounts drop dramatically, it will be interesting to see if the IRS or Treasury will offer any reasons, Obamacare or otherwise, for the decreases.

Have you finished your 2014 tax return? Did you encounter any Affordable Care Act filing problems? Did your health care coverage affect your tax bill?

Will You Have to Pay an Obamacare Fine?

If you are self-employed, and/or have fewer than 100 employees, you will not have to provide your employees health insurance. But there is a key part of Obamacare that will likely impact your pocketbook: the individual mandate. This means that you must get qualified health insurance for your family or pay an annual penalty (the law calls this the "individual shared responsibility payment").

OK, what does it amount to? For the current year, the penalty is the greater of $95 per adult and $47.50 per child, limited to a family maximum of $285; or 1 percent of your household income above your tax filing threshold (this is the amount for determining if you must file a tax return).


But the total penalty is capped at the national average for a bronze plan, which is roughly $2,448 per person with a maximum of $12,240 for a family with five or more members.

Kind of confusing? Well, to get a better idea of how this works, let’s take an example: Suppose you are married and have two children. Your household income is $70,000 and the filing threshold is $20,300.

2 adults X $95 + 2 children X $47.50 = $285
$49,700 (the $70,000 household income - $20,300 filing threshold) X 1% = $497
1% X $49,700 = $497
You will have to pay $497 since it is the higher amount (you can also check out this Obamacare calculator). You will list the penalty amount on your 1040 form.

Now, if you do not pay it, the IRS will not have the typical collection powers, such as with placing liens on your home or other property. However, the agency can deduct the penalty from any tax refunds.

If you do not get qualified insurance for 2015, then the penalty will be even steeper. It will be the greater of $325 per adult and $162.50 per child, limited to a family maximum of $975; or 2 percent of household income.


There are exceptions to the penalty. Some of the notable ones include:

You are already covered by a qualified employer plan.
You have coverage from a qualified off-exchange plan.
You have coverage under Medicare, Medicaid, The Children’s Health Insurance Program (CHIP), TRICARE (insurance for active members in the military) or Veterans Administration plans.
You are a member of a qualified Native American tribe.
Your income is too low for the filing of a tax return.
You qualify for a hardship exemption (this is broad, covering situations such as bankruptcy, foreclosure, eviction, homelessness, shut off from a utility, fire/flood, a victim of domestic violence and so on).
For many of these exemptions, you will need to apply for approval with the marketplace. This can take a month or two.

If you get an exemption, you will then receive an exemption certificate number or ECN. You include this on your tax return with form 8965.

But if an exemption does not apply and you do not get qualified health insurance, then you will be completely on the hook for your medical bills. Unfortunately, this could mean facing bankruptcy if you have a catastrophic medical event (although there are some limited health insurance policies that can potentially help). Besides, Obamacare does provide for subsidies that can greatly reduce the monthly premium payments on an insurance plan.

So if anything, it’s a good idea to check out the options from your state exchange or Healthcare.gov (if you state does not have an exchange). But you will have until Feb. 15 to enroll in a plan.

Quiet year in terms of tax changes, but ACA provides twist

President Barack Obama's signature health care law will bring a new twist to tax-filing in 2015, a year in which much else will seem familiar when you're working on your return.

"It's been a very quiet season or tax year" in terms of congressional action, says Bob Meighan, vice president of customer advocacy at TurboTax, the tax-preparation software company.

Sure, there have been adjustments for inflation in the tax tables, standard deduction and value of each exemption. But what could have been a stunner - the expiration of a series of popular tax breaks - was forestalled by Congress in a last-minute move before it adjourned last month. For individuals, that was the only major piece of tax

Unlike last year, there will be no delay to the start of the tax season, despite the late congressional passage of the tax extenders. The Internal Revenue Service said it would begin accepting electronic returns and processing paper ones as scheduled on Jan. 20.

"We have reviewed the late tax law changes and determined there was nothing preventing us from continuing our updating and testing of our systems," IRS Commissioner John Koskinen said in a statement.

So gather up those W-2s, 1099s, receipts and other data needed to file; you have about three months. The deadline remains April 15, although extensions are possible.

If you're due a refund, however, you might be in for a wait.

Noting that "people have gotten very used to being able to file their return and quickly getting a refund," Koskinen said at a news conference in December that "this year we may not have the resources, the people to provide refunds as quickly as we have in the past."

He blamed budget cuts, and declined to predict how long refunds would take. In previous years, it was about 21 days for those who filed electronically.

Last year, the IRS processed nearly 150 million individual tax returns, up about 1 percent from 2013. The average refund was $2,792.

Electronic filing continues to gain popularity; only about 16 percent of last year's returns were on paper.

"Filing electronically is the most accurate way to file a tax return and the fastest way to get a refund," the IRS said.

The biggest change for tax filers this year concerns the Affordable Care Act and the requirement that everybody have health insurance.

"The first year truly will be the hardest" in dealing with ACA, said Dave Duval, vice president for consumer advocacy at TaxAudit.com.

If you got insurance through an employer, from the private marketplace, or through a federal or state exchange without a subsidy, you simply check a box on line 61 of Form 1040 affirming that you had full coverage. "You don't send in documents for review," said Greg Rosica, tax partner at Ernst & Young.

But there are new forms to deal with, from the exchanges confirming your coverage and from the IRS.

Form 8962 will help determine if you got the right advance payment of the premium tax credit, or if it was too large because you underestimated income or had a life change, such as a new job with a higher salary. In that case, you might have to pay back some or all the advance payment. If you lost your job, you might be entitled to more in the form of an additional tax credit.

"This year many people did not go back to update their information," said Kathy Pickering, executive director of the Tax Institute at H&R Block.

Form 8965 will help you figure out whether you qualify for an exemption to the mandatory health coverage and can avoid a penalty. Tax experts advise people who didn't have coverage to look through the list of more than 30 coverage exemptions.

Penalties and lower subsidies could lead to a larger tax bill - or a smaller refund.

"We are working to ensure that whatever their experience, consumers can easily access clear information, since this is the first year they will see certain changes to their tax returns" because of the health care law, Treasury Secretary Jacob Lew said in a statement.

Tax rates for 2014 remain the same as in 2013, ranging from 10 percent to 39.6 percent for the wealthiest taxpayers.

But the value of a personal exemption edged up slightly to $3,950 because of inflation, and the standard deduction is now worth $12,400 for married people filing jointly, $9,100 for heads of households and $6,200 for single taxpayers.

The patch on the alternative minimum tax holds, also adjusted for inflation to prevent more middle-class people from being drawn in.

The legislation passed by Congress in December extends a series of popular tax breaks that help a broad range of taxpayers, from schoolteachers to college students and their parents, residents of states without income taxes and people who made energy-efficient improvements to their home. People who had debt forgiven on bad mortgages usually will not have to consider that as income. And required IRA distributions by seniors 70½ and older directly to a charity are tax-free.

Some affluent taxpayers could be in for sticker shock because of a surcharge on investment income, said Meighan, of TurboTax. "It's exacerbated by the market being at record levels. People who are buying and selling are likely to see very large gains," he said.

At the other end of the wealth spectrum, he said, "people who most need the money" are overlooking things like the earned income tax credit. About a quarter of those eligible are not claiming it, he said.

The IRS says that more than half of taxpayers hire a tax preparer to do their returns, and the agency urges caution in choosing one. Check preparers' credentials, and make sure they have an IRS preparer tax-identification number and file electronically, the agency says. "Never sign a blank return" and be wary of those who promise large refunds, it advises.

What about dealing with the IRS itself?

The agency has adopted a Taxpayer Bill of Rights covering 10 principles, from the right to get quality service from the IRS to the right to appeal IRS decisions, including penalties. The final principle covers the "right to a fair and just tax system."

National Taxpayer Advocate Nina Olson, whose agency helps taxpayers navigate dealings with the IRS, commended the agency for adopting the bill of rights.

"If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply of their own volition," she said in her semiannual report to Congress last summer. "By contrast, taxpayers will be more likely to comply if they have confidence in the fairness and integrity of the tax system."

How Do I Report My Health Insurance On My Tax Return For Obamacare?

FROM FORBES.COM -

If you believe the headlines, sorting out the Affordable Care Act (commonly referred to as “Obamacare”) is going to be the single worst moment of your 2015 tax filing season.

That might be true for some taxpayers. But most taxpayers – about 130 million or so – aren’t going to feel any pain at all. That’s because figuring out how to report coverage for those taxpayers who had coverage during the year for purposes of Obamacare isn’t hard. If you had “minimum essential coverage” for all of 2014 and you are not a dependent, you simply check the box on your tax return and move on. There are no calculations to figure and nothing to enter in the dollar column. You’re done.

You’re considered covered if you have insurance through the government, including Medicare, Medicaid, CHIP, retiree coverage, TRICARE, or VA health coverage; private insurance that you purchased on your own including COBRA coverage and coverage obtained through the Health Insurance Marketplace; or provided by your employer (even if you didn’t pay anything for the coverage).

Taxpayers filing a form 1040EZ will see the box at line 11.

Taxpayers filing a form 1040A will see the box at line 38.

And taxpayers filing a regular old form 1040 will see the box at line 61.

If you are a dependent, do not check the box: just move on. You’re all done with this question: leave the dollar column blank and do not need to attach form 8965.

If you are not required to file a tax return, you are considered exempt from the shared responsibility payment and you do not need to file a tax return to claim the coverage exemption. It’s important to remember that failing to file a tax return or owing taxes won’t disqualify you from obtaining coverage through the exchanges.

If, however, you are required to file a tax return for 2014 (see “Do You Need To File A Tax Return In 2015?“) and you did not have coverage for all of 2014, you need to file form 8965. You’ll use form 8965 to claim an exemption from the shared responsibility payment or to figure the amount of the payment.

Generally, you may qualify for an exemption if:

You’re uninsured for less than 3 months of the year;

The lowest-priced coverage available to you would cost more than 8% of your household income;

You don’t have to file a tax return because your income is too low;

You’re a member of a federally recognized tribe or eligible for services through an Indian Health Services provider;

You’re a member of a recognized health care sharing ministry;

You’re a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare;

You’re incarcerated, and not awaiting the disposition of charges against you; or

You’re not lawfully present in the U.S.

Hardship exemptions also apply if you meet certain criteria such as if you are homeless, bankrupt, a victim of domestic violence or if you cannot find affordable coverage. For more on hardship exemptions, including how to apply for an exemption, check out the healthcare.gov web site.

If you’ve been granted an exemption, you’ll report that exemption at Part I on form 8965.

If you’re claiming a coverage exemption because your household income or your gross income is below your filing threshold, you’ll report that at Part II on form 8965. Remember that if you don’t have to file a return in the first place, you don’t need to worry about this step (since you’re not filing, right?). It may be the case, however, that you choose to file a return even though you don’t have to – to claim tax credits, for example – in which case, you’ll need to tick this box.

If you’re claiming any other kind of coverage exemption, you’ll report that at Part III on form 8965.

If you don’t qualify for any of the exemptions, use the Shared Responsibility Payment Worksheet (found in the form 8965 instructions) to figure the amount of your payment. For 2014, the shared responsibility payment generally is equivalent to 1% of your income above the “filing threshold” or $95 per adult and $47.50 per child (up to $285 for a family), whichever is higher. Report the amount of the payment on your tax return on the same line where you DIDN’T check the box earlier (to recap, that’s line 61 on form; line 38 on form 1040A; or line 11 on form 1040EZ, as shown above). Attach the completed form 8965 to your tax return.

I’m not going to lie: figuring out that payment isn’t all that easy if you’re doing it by hand. But keep in mind that you ONLY figure the payment if you don’t have coverage, you haven’t been granted an exemption and you aren’t otherwise claiming an exemption. That’s just a handful of taxpayers – so don’t panic ahead of time. It’s highly likely that you won’t even have to deal with it.

If you do have to deal with it, there is some good information on the IRS web site about ACA. You can also head over to healthcare.gov once tax season opens for tools to help you prepare your return.

How Obamacare could complicate your tax return

FROM THE WASHINGTON POST:

The tax filing season should kick off in a few weeks without any major delays. But some taxpayers will still find it more frustrating than usual.

Along with marking their income and filing status, taxpayers will now have to say on their tax returns if they did — or did not — have health insurance last year. Those who received insurance subsidies or who went without insurance altogether are also going to face new forms, additional questions and some complicated math. “The Internal Revenue Service, in addition to being a tax collection agency, is now a health care agency,” says Michael Greenwald, an accountant and partner with Friedman LLP.

It won’t be complicated for everyone. The millions of Americans who are covered through their jobs, or who have insurance through other programs like Medicaid, Medicare or Cobra, will have to do little more than check an extra box on their tax returns.


 
“If you didn’t purchase [insurance] on a market place and did not get a subsidy, you’re pretty much done,” says Jeffrey Porter, an accountant with Porter & Associates. “But if you did, you’re going to have to go through a pretty complicated calculation.”

Here’s where things can get tricky:

If you got a subsidy for health insurance premiums: 

Most Americans who bought insurance on the exchanges for 2014 received subsidies that helped lower their insurance costs. Many focused only on what their monthly payment would be, without knowing what kind of discount they were getting. But come tax time, people will find out just how much of a subsidy they received — and if they have to pay part of it back.

The complication comes from the fact that many people applied for health insurance using their 2012 tax returns, the most recent paperwork they had at the time. If they saw a big raise after that, they may have to pay back some of the subsidy they received. If they made less than expected, they may be owed a bigger subsidy and see the difference added to their tax refunds.

As they wait for their W-2, 1099 forms and other income paperwork, people who received subsidies should also keep an eye out in the mail for the 1095-a, a form that should lay out just how much they received in a premium tax credit. They’ll need the document to file their tax returns. Taxpayers should try to avoid surprises by reporting changes in income to the marketplace as they happen, says Kathy Pickering, director of the H&R Block Tax Institute.


If you didn’t have coverage: 

If you didn’t have insurance in 2014 and you weren’t exempt from needing to have coverage, you’ll have to pay a penalty this year. Figuring out just how much you owe can get tricky. The fee amounts to $95 per person or about 1 percent of your household income. (And the fee is jumping to $325 per person, or about 2 percent of household income, for people who don’t have insurance in 2015.)

But the penalty is charged on a monthly basis. So you would owe a fraction of the fee for every month that you or your family went without coverage. There was also a grace period: You were allowed to go up to three months without insurance before the penalty kicked in. The worksheet in the instructions for Form 8965 can help you do the math.

The fee could be added to your tax bill or subtracted from your tax refund, but the IRS won’t have as much authority when it comes to collecting the penalty as it does for collecting other tax liabilities. For instance, the agency won’t be able to put a lien on your property if you don’t pay up as it can with other tax bills. People who don’t pay also can’t be subject to criminal charges. But the money could be added to future tax bills, so if you don’t pay now, you may have to pay eventually.

Some people may also avoid paying the penalty if they qualify for one of the 33 exemptions allowed. For instance, people who were in jail last year won’t have to pay. Neither will those who make so little they’re not required to file a tax return. Some people will qualify for religious exemptions.

If you take advantage of the honor system:

There’s one more thing tax pros are warning about. Some people who didn’t have insurance and who weren’t exempt may be tempted just to say they had insurance to avoid paying the penalty. Because many employers are not yet required to report information to the IRS about which employees have insurance, some people might get away with it.

But just as it can when it has questions about income or about whether a taxpayer really qualifies for a certain credit or deduction, the IRS could come back and ask for proof later. And next year, when more companies are reporting insurance information to the IRS, lying about coverage will get harder.

“Everything you put in your tax return is something that they’re trusting that you’re telling the truth,” Porter says. “And of course if they audit you, you will have to prove it.”

Tax Returns Complicated by Health Care Law and I.R.S. Staff Cuts

FROM THE NEW YORK TIMES:

The filing season for tax year 2014 starts in less than two weeks. While some people won’t have all the forms needed to file their returns until the beginning of next month, there’s good reason to start gearing up now — whether you prepare your own taxes, or pay someone to do it for you.

On the plus side, unlike last year when filing season was delayed by a government shutdown, the Internal Revenue Service says it is on track this year, and will begin accepting electronic tax returns and processing paper forms on Jan. 20.

But a combination of reduced help from the I.R.S., and potential confusion from new tax requirements under the Affordable Care Act, the federal health care law, may mean it could take longer to get your questions answered and file your return.

The I.R.S. has warned that budget cuts and staff reductions are likely to mean fewer customer service representatives answering questions by phone during this year’s tax season, resulting in longer waits on hold. Nearly half of callers to the agency’s toll-free help lines might not get through to a representative, John Koskinen, the I.R.S. commissioner, has said.

“This is not the year to wait until, say, April 10 to decide to do your taxes,” said Marcy Gouge, assistant national director of the AARP Foundation Tax-Aide program, which offers free tax help and return preparation from trained volunteers at more than 5,000 locations nationwide.

A major wrinkle this year is that for the first time, federal taxpayers must address their health insurance status when filing their tax returns. Most taxpayers will simply have to check a box on their return, stating that they have coverage.

But those who enrolled in health coverage on the government exchanges and received a tax credit — as many exchange shoppers did — will have to reconcile their income with their credit, which may affect their tax bill and the size of their refund.

Those who went without insurance for more than three months last year may have to file for an exemption or pay a penalty — which can increase the size of their tax bill or diminish a refund.

The confusion may send more filers to professional tax preparers, which are readying for a banner season. H&R Block, for instance, is promoting a free “A.C.A. Q. and A. Day” on Thursday, to answer questions about how the health care law might affect filers’ returns this year.

Kathy Pickering, executive director of the Tax Institute at H&R Block, said many taxpayers needed to be educated about the penalties that apply for going without insurance, and might need help filing for exemptions. (If filers believe they qualify for certain exemptions, but haven’t yet applied or received approval, the I.R.S. will allow the filer to submit the return with an exemption-pending code, she said.)

The added complexity of the A.C.A., combined with a tougher time getting through to the I.R.S., may drive up the cost of return preparation, since preparers may have to use fee-for-service options to get their questions answered, said Cindy Hockenberry, manager of the Tax Knowledge Center at the National Association of Tax Professionals. The group’s most recent research found the average cost of preparing a Form 1040 with itemized deductions was $200, she said.

Continue reading the main storyContinue reading the main storyContinue reading the main story
Free tax help is available. Tax-Aide operates many of the locations funded by the I.R.S.’s Tax Counseling for the Elderly program. While particularly suited to help those 60 and older, the locations offer free assistance to low- to moderate-income taxpayers regardless of age, Bonnie Speedy, the national director of Tax-Aide, said.

The I.R.S. no longer offers tax preparation services at its walk-in offices. But it funds the Volunteer Income Tax Assistance program, which provides in-person tax help and return preparation at community-based locations to those making $53,000 or less, seniors and those who are disabled or speak limited English.

You can search on the I.R.S. website for a volunteer location near you. Details vary by location; some sites begin operations on Jan. 20, while others won’t operate until early February. Some sites accept walk-ins, but others require an appointment. So it’s best to check ahead of time.

Here are some answers to common questions about this year’s tax filing season:

■ Where can I get more information about how the A.C.A. may affect my taxes?

The I.R.S. recently made available Publication 5187, Healthcare Law: What’s New for Individuals & Families, on its website.

■ How will I know what information about my A.C.A. plan to include on my tax return?

If you bought a plan through a government marketplace, you should receive a Form 1095-A in the coming weeks, which will have the details of your coverage and premium tax credit. If you don’t receive the form or misplace it, the federal exchange will make them available online as well; online availability at the state-run exchanges varies, Ms. Pickering said.

■ Are there any free options available for filing my taxes electronically?

The Free File Alliance, a partnership between the I.R.S. and 14 tax software companies, offers free online federal tax software and electronic filing for those earning $60,000 or less. (Availability of free state software and filing varies.) The program opens on Jan. 16 and includes offerings from TurboTax, TaxAct and others. To get the free version, make sure you access the software through the I.R.S. Free File website, Tim Hugo, the executive director of the alliance, said.

Two things Obamacare will do to your 2014 taxes

Alert: W-2s and 1099s for 2014 will soon be arriving in the mail. So it’s not too early to start thinking about putting together your Form 1040 for last year. For 2014, there are only two important federal income tax changes for individual taxpayers (beyond the usual inflation-indexing of tax rate brackets and various other tax parameters). Both changes have to do with Obamacare. Here’s what you need to know at tax preparation time.

Penalty for failure to carry ‘minimum essential coverage’

The Patient Protection and Affordable Care Act - also referred to as Obamacare - established a new federal income tax penalty for failure to carry so-called “minimum essential coverage.” Last year was the introductory year for the penalty, which can potentially be owed for any month when qualifying health coverage was not in force. (In IRS-speak, the penalty is called a “shared responsibility payment.”)

You don’t have to worry about the penalty if you (and all members of your family, if applicable) had qualifying coverage for all of last year. In this case, simply check the box on line 61 of Form 1040, and you’re done.


If you did not have qualifying coverage for the entire year, the first task is to determine if you are exempt from the penalty. For that, see the instructions to new IRS Form 8965 Health Coverage Exemptions (and instructions for figuring your shared responsibility payment). If you were exempt for last year, file Form 8965 with your 2014 Form 1040 to prove it. For additional information on exemptions, see IRS Publication 5187, Health Care Law: What’s New for Individuals and Families. Both Form 8965 and Publication 5187 can be accessed at irs.gov.

If you were not exempt, the next step is to calculate the penalty amount that you owe using the worksheet in the instructions to Form 8965. Enter the penalty amount on line 61 of your return. For 2014, the penalty can range from $95 or less to a good deal more for higher-income folks. For plain-English details, see Owe the IRS money? Here’s some good news. Also be aware that the penalty for 2015 and beyond can be much higher than the penalty for last year.




Premium assistance tax credit

The other Obamacare change for 2014 was the debut of the so-called premium assistance tax credit (PTC in IRS-speak). It is available to eligible individuals and families who obtain health coverage in a qualifying plan by enrolling through a state-run insurance exchange or through the federal exchange (healthcare.gov).

In general, you are eligible for the PTC if your household income was between 100% and 400% of the federal poverty line and you did not have access to affordable employer-sponsored coverage last year. The allowable credit amount can vary widely depending on your specific circumstances. For additional information on the PTC, see IRS Publication 974, Premium Tax Credit.

The PTC can be advanced directly to the insurance company to lower your monthly premiums or it can be claimed when you file your return. You may not know the exact amount of your allowable PTC for last year until you actually file your 2014 Form 1040. Calculate the PTC using new IRS Form 8962, Premium Tax Credit. Taken together, Form 8962 and its instructions add up to a daunting 17 pages. Enjoy!

If advance PTC payments were made on your behalf last year, the amount of those payments should be reported by the exchange to you on new Form 1095-A, Health Insurance Marketplace Statement. You should receive Form 1095-A by no later than early February. Then calculate the difference between your advance PTC payments (if any) and the PTC amount you are actually entitled to claim on Form 8962. Enter any excess PTC amount on line 46 of Form 1040 and pay it when you file.

Finally, you should know that the PTC is a so-called “refundable credit.” That means you can collect the full allowable credit amount even when it exceeds your federal income tax liability for last year. Specifically, the PTC amount is first used to reduce your federal income tax bill. After your bill has been reduced to zero, any remaining PTC can be either refunded to you in cash or used to make estimated tax payments for the 2015 tax year.

The bottom line

The good news is there were very few changes to the 2014 Form 1040, compared with the 2013 version. The bad news is the two Obamacare-related changes are very complicated. You may need to hire a tax pro to sort things out. The other bad news is that the Supreme Court may decide to disallow the PTC for folks who got their coverage through the federal exchange. (See The year’s biggest tax stories.) However, if that happens then some sort of accommodation will probably be reached for folks who relied on collecting the credit for last year. Stay tuned. I’ll keep you posted.

The IRS Mess That Will See Obamacare Enrollees Owing More Taxes

A new study from a tax preparation firm has found that half of all beneficiaries of Obamacare subsidies for insurance may have had subsidies that were too large, and are going to end up with much larger payments to the IRS this year than they were expecting.

As the Wall Street Journal reported:

As many as half of the roughly 6.8 million Americans who got subsidies may have to refund money to the government, based on one estimate by tax firm H&R Block Inc.

“The ACA is going to result in more confusion for existing clients and many taxpayers may well be very disappointed by getting less money and possibly even owing money,” said Charles McCabe, president of Peoples Income Tax and the Income Tax School, a Richmond, Va., provider of tax preparation and education. “The whole implementation of Obamacare will be frustrating for tax preparers.”

In addition to determining who has to pay a penalty, the accuracy of tax credits is likely to pose challenges. Because people often incorrectly estimate their future income, many Americans may have gotten subsidies—based on their own projections of 2014 income—that were too generous.

For Obamacare enrollees whose subsidies are too high, the average that they may owe back to the IRS is $208, though as the WSJ reported, "some filers got subsidies that were too small and will get larger refunds."

Still - that half of Americans are going to end up owing hundreds of dollars back to the IRS because of "overpayments" for Obamacare subsidies might come as a surprise to those millions of people.

Obamacare complicates the coming tax season

Obamacare's individual mandate is going to affect personal tax filings for the first time in the upcoming tax season, and the impact just might be a doozy.

"At a recent convocation of enrolled agents, I found that a good many of the veteran preparers are considering retiring because of the health care confusion and complexity," says Ken Shirk, founder and president of Lebanon-based Sonrise TagsAnd-Tax LLC.

There are two main issues. The first requires that filers prove they had qualifying health care coverage in 2014, or an exemption; if not, they'll be subject to a penalty.

The second centers on the federal subsidies for those with income between 138 percent and 400 percent of the federal poverty level who purchased health insurance through the Obamacare marketplace. These subsidies were based on enrollees' income estimates for the year and could be received via payments to the insurer throughout the year or as a lump sum upon filing 2014 tax returns.

"Receiving too much or too little in advance can affect your refund or balance due," the IRS says. If your income estimate was too low and you chose to receive the subsidy throughout the year, you'll end up owing the government for the difference between what you got and what, in retrospect, you were actually entitled to.

According to the U.S. Department of Health & Human Services, subsidies dropped monthly premiums 74 percent for eligible Pennsylvania enrollees.

What that means for preparers

Shirk says this addition to the tax-filing process is going to require numerous new forms, and he and other preparers expect that many clients will not initially have all the necessary information and documentation.

"Add to that the likelihood of people trying to scam the system to get undeserved credits, which the preparer must guard against due to the sanctions and fines that the preparer is subject to, and it's not a nice picture," he says. "Fees will increase dramatically in some cases because of the extra work and the increased liability for an improperly prepared return."

The IRS Volunteer Income Tax Preparation program, which in Lancaster County is offered through the United Way and is available to individuals and families who make less than $50,000, won't see fees increase, because it's free. But Steve O'Neill, United Way of Lancaster County's VITA adviser, does expect an increase in demand.

Last year, O'Neill says, about 185 volunteers prepared 4,850 returns in the county, saving participants an estimated $200 in preparation fees per return. The program has drawn mostly people from the lower end of the eligibility range, with average income of participants at about $18,000.

But because other services may be more complicated and more expensive this year, he thinks people who have gone to another preparer or done their own returns in the past may seek out VITA this year.

As usual, VITA is seeking new volunteer preparers, who don't need to be accountants but must pass an IRS certification program annually. This year, O'Neill says, they will be getting extensive training on the changes, but he doesn't think it will scare off veteran volunteers.

"I think they're looking forward to a new challenge and helping people with something that is difficult," he says.

One challenge VITA can't help people with directly is renewing or selecting health insurance through the Obamacare marketplace. Volunteers got lots of questions about that last year and referred them to other organizations with trained Obamacare navigators and assisters. This year, he says, the organizations might work together to have navigators and assisters at some VITA sites so they can answer questions immediately. <

"I think they're looking forward to a new challenge and helping people with something that is difficult."

How will Obamacare affect businesses in 2015?

One of the challenges in writing about the Affordable Care Act is that the law still is fluid, changing as the president and lawmakers in Washington weigh the consequences of some of its requirements.

For example, 2014 was to be the year in which employers with 50 or more employees would be required to offer health insurance or pay a penalty. That changed to 2015, and then it changed yet again. Now, businesses with 100 or more employees face the 2015 deadline. Those with 50 to 99 employees have until 2016 to comply.

The law ultimately will affect the taxes and operation of any business with the equivalent of 50 or more full-time employees. It will require those businesses to offer coverage that is affordable and of minimum value, or to pay a fine.

Affordable coverage, according to the law, should cost employees no more than 9.5 percent of their W-2 income. For coverage to meet minimum value standards, it must pay at least 60 percent of costs.

Employers who do offer insurance must report the cost of their employee health care premiums on their employees’ W-2 forms. They will also have to include health care costs on their business income taxes.

Those who do not offer insurance may face fines. Fines are levied if at least one worker uses the health insurance marketplace and that worker qualifies for a tax credit. The fine: $2,000 per employee, after the first 30 employees.

You may think it’s simple for an employer to determine if his or her business hires 50 or more full-time employees, but for some, that figure fluctuates.

Full-time employees are those who work 30 hours or more. That’s easy enough, but businesses with seasonal or part-time employees must calculate those hours, too. Each batch of 30 hours is equivalent to a full-time position. If those hours bring an employer’s full-time equivalents to 50 or more, the business faces the mandate.

Fortunately, employers with 50 to 99 employees have 2015 to pay close attention to their payroll, talk with their tax adviser and make necessary adjustments before the 2016 calendar year.

Those businesses with 100 or more employees also have 2015 to talk with the tax adviser and make adjustments. Although they are subject to the employer mandate in 2015, they are required to cover up to 70 percent of their employees, not the 95 percent that was the original target. Those businesses will have to cover up to 95 percent of their employees starting in 2016.

As for businesses with fewer than 50 employees, they will find little change in 2015. Those business owners are not required to offer health care coverage, but they may be eligible for a health care credit if they use the Small Business Health Options Program (SHOP) and offer insurance to their employees. Employers can claim the credit on their business income tax returns. They can go into the marketplace at any time to make changes.

The upcoming year will force business owners to grapple with the Affordable Care Act, but they need to continue to give voice to ways to improve the law and its implementation. Employer concerns helped push back the employer mandate deadlines, and their input can continue to shape the law.

How Obamacare could make filing taxes a nightmare

This tax season will be a messy one for most of Obamacare's 8 million enrollees.

Individuals and families who bought subsidized coverage have been receiving tax credits based on whatever amount they thought they would earn this year. Upon filing taxes, the IRS will reconcile the amount of subsidy received, based on expected income, with the person's actual income.

That's where things can get ugly.

If the person underestimated their income for the year — and got a higher subsidy than they actually deserved — they'll owe the government the difference. But if they overestimated their income, and received too small a subsidy, they'll see a bigger tax return.

How much of a problem is this?

Since most Obamacare enrollees are expected to have significant changes in their incomes, this could be a significant problem.

"Income volatility is much higher among those who were uninsured before reform than among those who had insurance," says George Brandes, vice president for health care programs at Jackson Hewitt Tax Service. "Many people with stable, salaried jobs already had health insurance through their employers."

In a 2013 Health Affairs paper, economists estimated that over 98 percent of enrollees on the California exchange would have some change in their income from one year to the next (they looked at 2018 and 2019).

Their analysis suggests that 38.4 percent of enrollees receiving subsidies would owe the government some kind of repayment if individuals never reported income changes to the exchange. Another 41 percent would receive tax refunds, because they would become eligible for bigger subsidies over the year. People can reduce these uncertainties by updating their information if and when their income changes.

The health law places limits on how much tax credit reconciliation could slam most enrollees. The limit ranges from $600 for low-income families up to $2,500 for those who earn more. Though capped, these sums still represent substantial financial shocks to low-income families.

"From Jackson Hewitt's perspective, the repayment liability caps do offer consumers some level of protection and predictability," Brandes said. "We have some sense of the order of magnitude that this is going to have on our customers."

But if income for the year was over 400 percent of the federal poverty line (about $95,000 for a family of four), the family is obligated to repay the subsidy in its entirety when filing taxes.

"One number in that study that really jumps out: 19 percent of households between 250 and 400 percent of the federal poverty line could wind up above that 400 percent threshold, which means the caps wouldn't apply to them. Then they're on the hook for the full face value of the tax credit," Brandes said. "That's one group where we're paying particular attention."

Perhaps softening the impact, repayments owed for overly-generous subsidies would take the form of lower tax refunds for many families.

"Having to repay a health insurance exchange subsidy might not necessarily mean that money will be owed to the IRS," the Health Affairs authors write. "Of the 132 million Americans who filed income tax returns in 2009, 83 percent received refunds, and 17 percent owed additional taxes."

Enrollees can help by updating their information when their income changes

"All of this illustrates how challenging it is to subsidize health insurance for low- and middle-income families through the tax system," said Larry Levitt, a vice president at the Kaiser Family Foundation.

The best thing for individuals and families to do is update their information within the health insurance exchange as soon as something changes. They have to do that through the actual exchange interface — which will have a section for changes in income or family circumstances — not through their insurer. Instructions for updating information on Healthcare.gov can be found here.

If people reported their income changes to insurers and had tax credits adjusted in a timely fashion, the number of people owing repayment would fall by 7 to 41 percent, and the size of the average repayment could be reduced by up to 61 percent, authors of the Health Affairs report found.

Enrollees can also take steps before the tax-filing process, especially if they're near the cutoff where the repayment caps no longer apply.

"There are things that can be done to change someone's modified adjusted gross income — you can make contributions to tax-preferred retirement vehicles, for example," Brandes said. "That can reduce your taxable income and push you back down into the tax credit range that allows you to benefit from the cap. There's a role for the tax-preparing industry here, not just in doing the reconciliation but also in terms of good tax-planning."

The key to smoothing these problems is education and outreach, but that's easier said than done. According to recent polling from the Kaiser Family Foundation, an estimated 40 percent of people receiving insurance subsidies don't actually realize the cost of their coverage is being offset by financial assistance from the federal government.

According to the same poll, over half of enrollees who did report receiving subsidies are concerned that their income will change and they will no longer be eligible for this financial help.

ObamaCare and early retirement

If your dream is to retire early, then you may get some help from an unexpected source: ObamaCare. Many people delay retiring until age 65 often due to healthcare costs in retirement. This tendency was recently studied by Boston College’s Center for Retirement Research in its working paper “Sticky Ages: Why is Age 65 Still a Retirement Peak?” It makes sense that individuals would delay retirement until they were eligible for Medicare (for most it’s age 65) because private health insurance is unaffordable for many, especially if you have a pre-existing condition or have reduced income due to retirement.

The Affordable Care Act (aka ObamaCare) helps to mitigate some of the cost of healthcare in retirement for certain individuals under age 65. To start with, ObamaCare makes it illegal for insurance companies to discriminate based on pre-existing conditions (effective January 1, 2014.)(1) This could make it possible for an older American with an illness to obtain insurance where before they may not have been able to in the private market. Secondly, ObamaCare states that an insurance company can only charge older Americans a maximum of three times the premiums it charges a young person, helping to rein in healthcare premiums for the older insured.

Further aiding young retirees are the subsidies built into ObamaCare. Subsidies are available to those individuals and families whose income is at or below 400% of the poverty line(1). In 2013 that amounts to $45,960 for an individual and $62,040 for a family of two. The level of subsidy increases or decreases based on your income in relation to the poverty line. Income for the purposes of the Affordable Care Act is based on Modified Adjusted Gross Income or MAGI.

The subsidies offered under ObamaCare increase in relation to one’s age. So for example, a 60 year old with $35,000 in annual income should receive a larger subsidy than a 25 year old with the same income. The plan was designed to help offset the higher premiums usually paid by older individuals compared to younger ones. Again, this is another benefit to someone considering retiring early and who has lower taxable income.

It is interesting to note that because the subsidies under ObamaCare are based on income rather than net worth, it could be possible for an early retiree who has a moderate or even a high net worth, but low taxable income, to qualify for the subsidies. Early retirees have a few things going for them when it comes to qualifying for subsidies. First, they are probably not receiving Social Security benefits yet because they have not reached their full retirement age. This could help reduce their taxable income. Secondly, many retirees have a good portion of their retirement savings in tax deferred vehicles like 401(k)s and IRAs. These vehicles are generally not taxed until distributions are taken out. So, it would be theoretically possible for a young retiree to have ample savings built up in tax-deferred saving accounts and still qualify for subsidies.

The Affordable Care Act is a large and complicated piece of legislation. I would encourage anyone interested in learning how the law affects their unique situation, to consult with their own tax and legal advisors.

8 Ways to Be Exempt From the Individual Mandate Under Obamacare

FROM DAILYFINANCE.COM -

The official start of enrollment under Obamacare kicked off roughly seven weeks ago under less than ideal circumstances, and early enrollment figures, especially from the federally run website, Healthcare.gov, have been nothing short of dismal.

Despite the opposition's cries for repeal and a relatively poor start -- largely blamed on a mixture of poorly constructed IT architecture and the government not allotting enough time to test the system -- the keystone of the Patient Protection and Affordable Care Act, known as the individual mandate, has not been delayed and is still expected to go into effect on Jan. 1.

As a refresher, the individual mandate is the actionable part of the PPACA that requires individuals to purchase health insurance of face a penalty in 2014 of the greater of $95 or 1% of their annual income. This penalty increases in size through 2016, when it equates to the greater of $695 or 2.5% of annual income should an individual choose to go without insurance. Each year after 2016, it will increase by the inflation rate.


As you might imagine, a good chunk of people need to purchase health insurance, renew their existing plan, or choose to go without. There are, however, a select number of groups -- eight to be exact -- that are exempt from the individual mandate, and therefore its penalties. Let's take a closer look at which groups are currently exempt under the PPACA's laws.

1. Select religious groups

The first exemption relates to those religious sects whose beliefs forbid them from obtaining health insurance, such as the Amish. For those of you thinking of starting your own religious sect to remain exempt from the individual mandate, you may want to have a back-up plan; there are pretty cut-and-dried rules as to what qualifies. According to the IRS, an individual would need to prove membership in a qualified exempt religious sect and have waived all Social Security benefits and rights. Chances are better than not that you aren't exempt from Social Security. Furthermore, according to the IRS, the sect or division must have "been in existence at all times since December 31, 1950."

2. American Indians

One group more likely to see exemptions from the PPACA are members of federally recognized Indian tribes. The U.S. Department of Indian Affairs maintains a federal registry of all qualifying tribes, which equates to more than five full pages of exemptions. You can check to see if your tribe qualifies by going here (link opens PDF file). Keep in mind that this doesn't mean American Indians are all uninsured, because that isn't the case. It just means that Indian Health Service and tribal-run health facilities take care of their health needs on tribal land. Should American Indians choose to live away from their tribal land, they are free to obtain health insurance on their state- or federally run health exchange under Obamacare.

3. Citizens who do not need to file a tax return
In addition to qualifying religious sects and American Indians, those who fall below the federal household income threshold and don't need to file federal income taxes are exempt from the individual mandate. Simply put, the PPACA is all about bringing affordable health insurance to Americans. If someone's annual income is below the poverty level, they wouldn't be able to afford health insurance. Therefore, they aren't going to be penalized if for some reason they choose not to maintain health insurance.

4. Those who are incarcerated

No, this is not a calling card for you to go commit a crime to get out of Obamacare! But the truth is that people who are incarcerated in jail, prison, or other penal institutions are exempt from the individual mandate. Once you're free, though, you'll be expected to purchase health insurance unless you meet one of these other seven exemptions.

5. Citizens who would be required to spend more than 8% of their income on health insurance premiums

If you do make more than the income threshold that requires you to file income taxes, you're not out of luck just yet. If you as an individual plan holder or member of a company-sponsored plan pay more than 8% of your annual salary out of pocket in premium costs based on the lowest-cost plan available (i.e. bronze), then you are exempt from the individual mandate under the PPACA's laws. Keep in mind this is a fluid figure that could change on a year-to-year basis. Also, the employer mandate should crack down on incidences of this happening when it goes into full effect on Jan. 1, 2015. When fully enforced, it will penalize businesses with 50 or more full-time employees that aren't offering health insurance to employees and that aren't subsidizing health insurance premiums in cases where premiums hit a certain threshold of an employees' annual salary.

6. Those who can claim a hardship

It seems that every law has to have its gray area, and if there's an exemption that can sometimes be difficult to pinpoint, it's those persons claiming a hardship. The concern here is that a hardship doesn't meet one definition, but has roughly one dozen noted exemptions according to the Centers for Medicare and Medicaid Services guidelines. Hardships listed include being evicted within the past six months, being homeless, recently experiencing the death of a close family member, filing bankruptcy within the past six months, or being found ineligible for Medicaid because your state didn't expand its Medicaid program. These are just a handful of the hardships which may grant you an exemption. You can read the full list at the CMS' marketplace exemption website (link opens PDF file).

7. Those who are not lawfully present in the U.S.

Put plainly, those persons who are not U.S. citizens or U.S. nationals (i.e. without lawful presence) are exempted from the individual mandate. That might seem like a double-standard to let non-citizens off the hook, but there's no way to enforce a penalty on someone that most likely isn't even paying taxes or filing them in the U.S. in the first place!

8. Those citizens who go uninsured for a period of less than three months per calendar year

Go ahead and throw an asterisk next to this one, because it does assume that you'll be purchasing health insurance for nine of the 12 months out of the calendar year. However, the PPACA allows you to go without coverage for a period of up to three months per year without being penalized. This is to account for things like changing jobs or perhaps a temporary hardship like moving.

Obamacare Will Lift Tax Fraud To A Whole New Level

FROM FORBES.COM

The healthcare.gov website continues to be a nightmare for those Americans trying to enroll and receive subsidized insurance. The law behind it all, the Patient Protection and Affordable Care Act, commonly known as Obamacare, is also causing millions of Americans to lose their current insurance (over 5 million so far). These unfortunate people had low-priced insurance plans with limited coverage, plans that do not meet the minimum requirements for insurance under Obamacare. There is only one group of people that appears set to win from Obamacare: tax fraudsters.

The main feature of Obamacare is a system of subsidies to make insurance affordable for people who earn too much to qualify for Medicaid and too little to afford market price insurance policies. The law also provides coverage for children under 26 on their parents’ insurance and people with pre-existing conditions can now buy insurance at more favorable premiums. However, the main mechanisms for expanding coverage are making people eligible for Medicaid or offering them subsidies.

People who earn slightly more than the poverty level and who were not previously eligible for Medicaid (either because of earning too much or because they are childless adults) will now get Medicaid, free federal government health insurance, if they live in a state that agreed to expand Medicaid to cover that group of people.

People who earn from 133 percent to 400 percent of the poverty line are eligible for subsidies when they purchase insurance policies through a state exchange. There are currently lawsuits over whether it is legal for the federal government to offer the subsidies to people who buy insurance from the federal exchange (the law never says they can). However, the Obama administration plans to offer the subsidies through the federal exchanges whether it is legal or not.

These issues are all fairly well known, but what has been much more sparsely reported is that the law is almost perfectly designed for tax fraud. This tax fraud, which will be at least somewhat legal, will happen in two stages.

First, the way the Obama administration is implementing the law allows people to state their income with little to no verification. By stating a low income, people can qualify for a large subsidy which gets paid in advance. When people receiving 2014 subsidies file their taxes in April 2015, if it turns out their income was higher than they originally stated, you might think they would then have to repay the subsidy.

But now we get to the second part of the tax fraud. Under the law it is not only difficult for the government to get its money back, in some cases it is legally impossible. There are two limits on the ability of the IRS to collect the overpayment.

The IRS is not allowed to place a lien on your property or garnish your wages in order to collect money owed under Obamacare. This applies to both overpayment of subsidies and to the penalty for not purchasing insurance at all. That means unless a person voluntarily pays what is owed the IRS can only collect money from people who would otherwise be owed a refund on their taxes. If someone owes money either for not purchasing insurance or overpayment of a subsidy, the IRS can deduct the amount owed from the refund the person would have received. If they are not owed a refund large enough to collect the entire amount, there is nothing more the IRS can do.

In addition to the above difficulties that the law places on the IRS, the law also limits the amount of any subsidy overpayment that must be repaid under any circumstances (look at the very end of the law in this link). In other words, if a person lies about their income in order to collect a larger subsidy, there is a good chance that they legally can keep at least some of the overpayment.

For example, for a family with actual income of less than 200 percent of the poverty line (around $47,000 for a family of four), the most that must be repaid is $600. If the family’s income is as high as $115,000, they still cannot be forced to repay more than $3,500.

Given that the Obamacare subsidies for a family of four can easily be $10,000 or more the difference between what is paid as an undeserved subsidy and the amount that must be repaid could be quite large.

Recent reports have described how the IRS has been paying $4 billion per year in fraudulent refunds filed by thieves who didn’t even do a particularly good job of disguising the fraud. The IRS was also found to have paid over $110 billion in fraudulent earned income tax credits over a decade. Thus, tax fraud is a major problem already and Obamacare seems almost to be intentionally designed to make tax fraud easy.

There is little that can be done to tighten up the income verification in an effort to prevent overpayment of subsidies to begin with. For one thing, the Obama administration does not want to verify incomes because they want people to get big subsidies and because it would slow the process down even more (if that is possible). Beyond that, the entire income verification problem is very complex. The IRS only has full income data for the last tax return filed, which is one year old. Using that, they must try to determine the family’s likely income in the coming year. Over a two year period, incomes can change a lot, so over- and under-payment of subsidies is unavoidable.

Worries about tax fraud related to the Obamacare subsidies caused Senators Hatch and Coburn to send a letter to the IRS last week asking about their plans to minimize such fraud. My guess is the answer will be nothing because the law does not really allow the IRS to stop the fraud.

Obamacare is going to be one of the largest government programs we have as measured by spending, with most of the spending occurring through the subsidies designed to make insurance affordable. Yet the program is designed in a manner that invites tax fraud on a massive scale. Just understate your income, arrange your withholding so you are not due a refund, and keep your subsidy overpayment with no fear of reprisal.

Given that an entire industry has grown up helping people commit tax fraud using the earned income tax credit, we should expect a similar phenomenon to arise around the Obamacare subsidies. If the IRS cannot minimize fraud when they have the full range of their enforcement powers, how bad is the fraud going to be when the IRS has both hands tied behind its back?

How Obamacare will affect your federal tax return.

Politics aside, the Affordable Care Act could affect your federal taxes this year and in years to come.

The law’s tax implications aren’t as large as when President Ronald Reagan rewrote the tax code, but they are significant. Historically, I would compare it to when President Carter implemented the windfall profit tax. People don’t understand that there are tax implications.

The two biggest changes are the penalty for not buying insurance and the additional tax, called a Medicare surtax, starting on wealthier households.

If you don’t buy insurance for next year, the penalty is relatively small — $95 per adult and half that per child.

A family of four with a $54,500 income would have a $272 penalty in 2013. But by 2016, that penalty will increase to $2,085. Many families are dependent on their tax refund, and the penalty will be deducted from that.

For those with much higher incomes this year ($250,000 in adjusted gross income for a married couple) the Medicare surtax will add a tax of 3.8 percent on net investment income and 0.9 percent on compensation.

That’s a big deal from a tax preparation standpoint. Many who are getting taxed may not be paying enough in terms of withholding now and will owe that tax when they file.

One possible way to lower your income and avoid the tax is to invest in a Roth IRA or convert a regular individual retirement account to a Roth IRA.

Some employees are also having to make health insurance decisions for the first time if their employer drops coverage and pushes them to the new federal healthcare exchange.

A lot of people are afraid because they haven’t had to make that decision before and are confused about the subject. A lot of education is required.

Many are also unaware that they are eligible for tax credits to help pay insurance premiums.

The income levels are pretty high for the credit. It goes up to 400 percent of the poverty level, which can mean a modified gross income in the $90,000s for a family of four.

The tax credit is based on estimated income.

If your taxable income goes up when you file in 2015, you may have to refund the subsidy you got in 2014.

Read more here: http://www.star-telegram.com/2013/11/15/5339658/how-obamacare-will-affect-your.html?rh=1#storylink=cpy

Obamacare tax could surprise some wealthy filers

It's hard to keep all the new Obamacare taxes straight, but there's one that some couples won’t see until they file their 2013 taxes next April, and bizarrely it could mean a surprise tax bill or a refund. It's the 0.9 percent Medicare surtax on wages and self-employment income (not to be confused with the separate new 3.8 percent net investment tax on capital gains, dividends and passive income).

Can you lessen the bite of the 0.9 percent surtax? In some cases, yes, if you act before year-end, says Mark Nash, a partner in PWC's Private Company Services practice in Dallas.

The surtax -- or additional Medicare tax (it is levied on top of the Medicare tax you already pay) -- is effective Jan. 1, 2013 and applies to wages and self-employment income above $250,000 per couple or $200,000 for a single. It applies to active income from a general partnership, but retirees get a break -- distributions from retirement accounts and Social Security benefits aren’t assessed the surtax.

Once you earn more than $200,000, you'll see the withholding for the 0.9 percent surtax on your paystub. Employers are obligated to collect the tax -- without regard to the employee's filing status or outside compensation.

So if you're a high-earner single with a corporate job, it's straightforward. You pay 1.45 percent Medicare tax on the first $200,000 of compensation plus 2.35 percent (1.45 percent plus the additional 0.9 percent) on compensation in excess of $200,000. (This is on top of the Social Security tax rate of 12.4 percent -- 6.2 percent paid by the employee and 6.2 percent by the employer -- calculated on the "wage base" up to $113,700 in 2013.)

Note: the impact of the additional Medicare tax goes up the more your salary goes up because unlike Social Security tax, there is no cap on the amount of compensation subject to Medicare tax, notes Mark Luscombe, a federal tax analyst with CCH, a Wolters Kluwer business, in the CCH 2013 Year-End Tax Planning Guide (.pdf file).

What gets complicated is if you hold more than one job, or have a day job and self-employment income on the side, and that pushes your total income above the threshold. Couples where one spouse is over the threshold and one is under, or where both spouses are under the threshold but combined they are over it, can all face underwithholding problems too.

Here's an example. If both spouses make $200,000, they're exempt on only $250,000, which means they're underwithheld by $1,350. That's what they'll owe come April if they don't adjust their W-4 withholding or pay in estimated tax payments to pay in now. If they don't take these corrective measures, they'd owe a penalty of about $27 calculates Kaye Thomas, founder of Fairmark.com.

For a couple with one high-earner spouse who sees the withholding on his paycheck and a spouse earning $100,000, they'll owe $900 in April.

Who gets a refund? A high earner spouse with a stay-at home or low-earner spouse. Say the high-earner spouse brings in $250,000 and the spouse is retired. The high-earner spouse's employer would be withholding on that extra $50,000, and it would be extra withholding.

Bizarrely, you can't fix this by asking your employer to stop withholding for the surtax -- nor can you fix the underwithholding example by asking your employer to withhold the surtax. Instead you have to adjust your W-4 to withhold more or less regular income tax.

"You're supposed to have figured this out," says Nash, who has been helping clients run the numbers to plan for the surtax.

Here are some ideas.

For wage earners, deferring the exercise of options or deferring some income as part of a nonqualified deferred compensation plan into next year could keep you under the threshold for this year. Unfortunately, the way the calculations work, stashing more in your 401k won't help reduce the amount of your wages subject to the surtax.

Self-employed individuals have more room to finesse or bunch their income. They could defer billing and collections until January 2014 and/or accelerate expense payments into 2013 to offset 2013 income. To the extent S Corp owners draw more than $200,000 in salary, they could take more as S Corp distributions and less as salary, but within reason. "You can’t manipulate this without any conscious at all," says Nash. (The Medicare base tax is 2.9 percent for the self-employed, so the surtax increases the total Medicare tax to 3.8 percent on self-employment income.)

Another warning: if you're just under the threshold, watch out. The threshold amounts are not indexed for inflation, so the tax will snare more people each year.