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HOW THE 2010 AFFORDABLE CARE ACT AFFECTS INDIVIDUAL AMERICANS

In 2010, Congress passed the Affordable Care Act, called ObamaCare by some, which is having major impact on individual Americans. Several changes started in 2014, but it all really began in 2013.

2014 Changes Affecting All Americans

Unless exempt, all Americans starting January 1, 2014 are required to have reasonable quality health insurance for themselves and their dependents, or pay a penalty that will be added to their individual income tax return. You are exempt if you already have qualified insurance such as Medicare or employer-provided coverage or meet one of the numerous other exemptions. New insurance exchanges are in place to allow all individual Americans to purchase their own health insurance in a price-competitive manner from these government run agencies.

All health insurance is now guaranteed issue and pre-existing conditions must be covered without a premium increase. In fact, the only premium differences allowed are for age, family size, smoking and geographical area differences.

Individuals who are not able to afford insurance may qualify for a substantial federal tax credit to be used every month towards the insurance premium. They qualify for the credit if their costs exceed certain levels and if their income meets certain family size restrictions. The credit in 2014 is estimated based on your 2013 income; if the credit is overestimated you may have to pay some or all of it back, so planning is extremely important.

2013 Changes Affecting All Americans

Starting with their 2013 individual tax return, more Americans lost the ability to deduct medical expenses (including health insurance paid with after-tax dollars) on their tax returns. The Affordable Care Act increased the amount of expenses needed before medical deductions are allowed to 10% of adjusted gross income. As an example, if your family income is $70,000 you would need $7,000 of medical expenses before anything would be deductible, and then only the amounts spent in excess of $7,000 would be allowed. Americans aged 65 or over at the end of the year are allowed to use the old 7.5% threshold for deductible costs through 2016.

The other change affects those workers utilizing an employer-sponsored fringe benefit called a Healthcare Flex Spending Account (FSA). These are excellent plans and should be utilized to the full extent possible for most people, but starting with the 2013 year the maximum amount you may set aside for this dropped to $2,500 annually, per person, per employer. This means that a married couple may each defer $2,500 annually and if you work a second job that offers this plan you may defer an additional $2,500. Most Americans do not understand this plan, setting aside $2,500 for a Healthcare FSA can save the average American approximately $800 in federal income, Social Security and Medicare tax as one of the single best tax shelters available today for the average person.

2013 Changes Affecting Wealthier Americans

Taxpayers with wages or similar earned income over $200,000 (single) or $250,000 (Married, joint) will pay an additional Medicare surtax of .9% for every dollar of earnings above this base amount. Taxpayers with any type of income (not just earned income) higher than the above amounts will pay an additional 3.8% unearned income surtax on investment earnings such as interest, dividends, capital gains and other similar items.

Also starting in 2013, higher income Americans lost their ability to deduct themselves or their children as dependents and will also see most of their itemized deductions disallowed as income increases. Finally, higher income Americans saw an increase in the highest income tax bracket to 39.6% and an increase in the capital gains rate to 20%.

Adding insult to injury, the “marriage penalty” is back.  Couples with combined income as low as $110,000 may have to pay more income tax if they are married than if they are single.