Today, I’m kicking off my annual “Taxes from A to Z” series. For the series, I’ll focus on tax terms that might not get much play on a day to day basis… If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, this is one series you won’t want to miss.
With all of the press coverage surrounding the Affordable Care Act (called “ACA” and also referred to as Obamacare or the Health Care Act), it feels like your 2013 income tax return is going to be chock full of changes.
That’s actually not the case. Most taxpayers won’t be impacted at all by ACA for 2013. There are a few exceptions:
- Medical expenses deductions are more difficult to come by. The threshold for claiming medical expenses is now 10% of adjusted gross income (AGI) as compared to 7.5% of AGI in 2012 (there’s an exception for those over the age of 65 – those folks get to keep the 7.5% threshold). That means that, in addition to the requirement that you itemize your deductions, your qualifying medical expenses must exceed 10% of your AGI before you can claim the first dollar: the higher the AGI, the higher the threshold.
Here’s a quick example: Let’s say your AGI is $50,000. That means you must have at least $5,000 in qualifying medical expenses before you can claim any medical deductions. In that example, if you have $3,400 in expenses, you can’t take the deduction ($5,000 – $3,400 < 0); if you have $5,000 in expenses, your deduction is still 0 ($5,000 – $5,000 = 0); if you have $7,500 in expenses, your deduction is $2,500 ($7,500 – $5,000 = $2,500).
- There’s a new Medicare surtax. Beginning in 2013, taxpayers who make over $200,000 ($250,000 for married taxpayers) will be subject to the Medicare surtax. If that’s you, a Medicare surtax will be tacked on to your wages, compensation, or self-employment income over that amount. The amount of the surcharge is .9%.
- The Net Investment Income Tax (NIIT) applies to high wage earners. Even if you aren’t affected by the Medicare tax surcharge, you still may be subject to the Net Investment Income Tax (NIIT) if you have both net investment income and modified adjusted gross income (MAGI) of at least $200,000 for an individual taxpayer and $250,000 for taxpayers filing as married. Net investment income includes items like interest, dividends, capital gains, rental and royalty income, and certain income from businesses. It doesn’t include wages, unemployment compensation, operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from certain Qualified Plans.
- Your form W-2 may look a bit more crowded. In 2013, the cost of employer-sponsored health coverage may be reported on your form W-2. You’ll find it at box 12 using Code DD. This amount is reportable under the Affordable Care Act but it is not taxable to you.
- Flexible Spending Accounts (FSA) are capped. In prior years, employers set the limits for FSAs – pre-tax dollars that you are deducted from your salary – without any caps. In 2013, the amount of salary reduction contributions is capped at $2,500 a year.
Those are the highlights for the 2013 tax year. Other key provisions – the ones making the rounds for 2014 – are not yet applicable. Don’t confuse changes which took effect as of January 2014 with reporting requirements for 2013. Keep in mind:
- The individual shared responsibility provision (sometimes referred to as the health care penalty) and the premium tax credit does not affect your 2013 federal income tax return.
- If you do not have a tax filing requirement, you do not need to file a 2013 federal tax return to establish eligibility. You also do not need to file a 2013 federal tax return to qualify for an advance payment of the premium tax credit to purchase health insurance coverage through the exchanges.
One of the things that the Affordable Care Act doesn’t offer is simplicity. Navigating these changes can be confusing. If you have questions about how the changes affect you, be sure to ask your tax professional.
