As much as Obamacare will affect your medical care and your health insurance coverage, the effects don’t stop there. The legislation also made major changes to the tax laws — with ramifications not just for this year but extending well into the future.
Lawmakers embedded several different tax provisions into the broader Obamacare legislation. Those changes will have an impact on taxpayers at all income levels.
Perhaps the biggest change in the law expanded the tax that workers currently pay for Medicare to cover both higher amounts and different types of income. Until this year, workers paid 1.45% of their wages in Medicare withholding taxes, with employers paying another 1.45% out of their own pockets. Self-employed individuals paid the combined 2.9% on their own. Although the amount of wages subject to Medicare tax used to be limited in the same way as Social Security withholding, that changed in 1991, and by 1994, the limits on wages subject to Medicare taxation were removed entirely.
Going forward, though, Obamacare imposes additional Medicare taxes on certain individuals. In particular, two groups will be affected:
“ Joint filers with wages or other work-related earnings greater than $250,000 and singles earning more than $200,000 will have to pay an additional 0.9 percentage points in Medicare tax, bringing their total to 2.35% for employees or 3.8% for self-employed workers. Employers are supposed to handle this requirement in their withholding, but for two-earner couples, that may prove impossible, as your employer will have no knowledge of what your spouse earns.
“ Those with total adjusted gross incomes of more than $250,000 for joint filers, or $200,000 for singles, will have Medicare taxes imposed on their investment income as well. On whatever amount of investments exceeds the $250,000 gross-income level, you’ll have to pay the full 3.8% surtax yourself.
The net effect on high-income earners will be to bring total top tax brackets to 43.4% — the 39.6% regular tax amount plus the 3.8% Medicare tax.
Hitting lower-income workers
Those who earn less than these $200,000 and $250,000 thresholds shouldn’t assume that their taxes will be unaffected by Obamacare. New limitations on flexible spending arrangements have hit taxpayers of all income levels, limiting the amount you can set aside tax-free in a flex plan to $2,500 per year. Previously, there was no technical upper limit, although most employers imposed a $5,000 maximum. But for those who have high levels of predictable medical expenses, the forced reduction in flex-plan use could cost you hundreds of dollars in extra income, Social Security withholding, and Medicare withholding taxes.
Moreover, those who rely on deducting medical expenses won’t be able to get as big a tax benefit from them. Obamacare raised the floor on itemized medical expenses from 7.5% of gross income to 10%. That may not sound like much, but it could reduce your deduction by thousands of dollars and thereby increase your tax bill substantially.
Will you get any benefit?
The question, of course, is whether Obamacare’s benefit will exceed the extra taxes you’ll pay. The jury’s still out on that question, but some have watched the way that health insurance and hospital stocks have reacted to Obamacare and have concluded that much of the benefit will go to industry players rather than to individuals. For newly covered individuals, the fact that they’ll have coverage at all may be the only benefit they’ll get from Obamacare, with higher taxes simply being part of the price we all pay for it.
Regardless, as you consider your taxes this year, don’t forget about the new Obamacare provisions. Planning for them now could save you from a big headache down the road.