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Obama Care Starts to Take Shape With Your 2012 Tax Return

WRITE-OFFS WILL GET TOUGHER

The tax code will get less generous when it comes to writing off healthcare expenses other than insurance. The 2012 tax year is the last one for which medical costs over 7.5 percent of adjusted gross income (AGI) can be deducted. Starting in 2013, that figure jumps to 10 percent. (An exception is individuals or... spouses who turn 65 before the end of 2013, who will retain the 7.5 percent floor through the 2016 tax year.)

Finally, all employees will also find contributions to pre-tax health flexible-spending accounts capped at $2,500 this year. Working spouses, however, can each open an FSA with their respective employers, which would allow them to put aside a total of $5,000.

NEW TAXES, TOO

Other provisions of the Affordable Care Act will add to some taxpayers' burdens.

High-income earners now pay an additional 0.9 percent Medicare payroll tax on income over $200,000 for individuals and $250,000 for couples. That comes on top of the previous Medicare tax of 1.45 percent.

CARROTS AND STICKS

The new law's individual mandate depends on income-dependent subsidies and penalties to make it work.

This will primarily affect people who don't have insurance or buy their own and are likely to look to new state exchanges for their policies. When they choose their plans, they will receive tax credits if the cost of the coverage is deemed too high relative to their income.

Those who don't buy coverage for 2014 will face penalties of $95 or 1 percent of household income, whichever is greater. That will increase each year to $695, or 2.5 percent, in 2016.

Subsidies will be available for families who earn as much as 400 percent of the federal poverty rate - roughly $45,000 for an individual or $92,000 for a family of four. For example, a family of four making $70,000 could expect a government tax credit of $5,504, which would cover about 45 percent of its insurance costs. 
 
GETTING INCOME RIGHT

Some taxpayers may run into trouble this year by underestimating their income and receiving a larger subsidy than they are ultimately eligible for you will owe a large payment back to the IRS" down the road.

The formula for calculating subsidy eligibility adds some foreign income and tax-exempt interest income to adjusted gross income, so people may have little taxable income but still make too much to qualify for the subsidies. There's another wrinkle: Even if you do everything right in 2012, you could end up owing some subsidy back on your 2014 taxes if you earn more then. But you won't have to worry about that until 2015.

Make no mistake, though — the government wants to sweeten the pot for those buying insurance on their own as much as it can. Self-employed workers can still deduct the cost of their policies. And while workers may start seeing how much their companies are spending for their healthcare on their 2012 W-2 forms, that amount won't be considered taxable income.

WRITE-OFFS WILL GET TOUGHER

The tax code will get less generous when it comes to writing off healthcare expenses other than insurance. The 2012 tax year is the last one for which medical costs over 7.5 percent of adjusted gross income (AGI) can be deducted. Starting in 2013, that figure jumps to 10 percent. (An exception is individuals or spouses who turn 65 before the end of 2013, who will retain the 7.5 percent floor through the 2016 tax year.)

Finally, all employees will also find contributions to pre-tax health flexible-spending accounts capped at $2,500 this year. Working spouses, however, can each open an FSA with their respective employers, which would allow them to put aside a total of $5,000.

Also starting in 2013, high earners pay a 3.8 percent Medicare tax on interest, dividends, capital gains, rent and royalty income.

And while employers have been withholding the extra payroll taxes from high-earning workers since January 2013, some people will now have to file estimated taxes as well.Those who have high investment income, or couples who together earn more than $250,000 but aren't having the extra 0.9 percent taken out of their paychecks should consider paying extra taxes quarterly to the IRS, lest they end up owing extra - and penalties when they file their 2013 taxes.

1 Comment to Obama Care Starts to Take Shape With Your 2012 Tax Return:

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Accountants Birmingham on Monday, March 25, 2013 1:11 AM
Fantastic blog post and very useful information about the 2012 tax returns. I must appreciate the brilliant work by brilliant writer. Keep blogging. Best of luck.
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