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What Obamacare means for taxes

The sweeping health care law, upheld by the Supreme Court, includes changes for next year.

By MSN Money Partner Jun 29, 2012 12:09PM

This post comes from Bill Bischoff at partner site SmartMoney.


President Barack Obama's Affordable Care Act, which was deemed constitutional Thursday by the Supreme Court, includes some major tax changes that will take effect next year. Here's a refresher course on how sweeping health care reform will affect individual taxpayers like you.


Medicare tax

Image: Tax forms (© C Sherburne/Photolink/Photodisc Red/Getty Images)Right now, the Medicare tax on salary and/or self-employment income is 2.9%. If you're an employee, 1.45% is withheld from your paychecks, and the other 1.45% is paid by your employer. If you're self-employed, you pay the whole 2.9% yourself.


Starting in 2013, an extra 0.9% Medicare tax will be charged on: (1) salary and/or self-employment income above $200,000 for an unmarried individual, (2) combined salary and/or self-employment income above $250,000 for a married couple that files jointly, and (3) salary and/or self-employment income above $125,000 for those who use married filing separate status. For self-employed individuals, the additional 0.9% Medicare tax hit will come in the form of a higher self-employment bill.


Medicare tax on investment income

Right now, the maximum federal income tax rate on long-term capital gains and dividends is 15%. Starting in 2013, the maximum rate on long-term gains is scheduled to go up to 20% and the maximum rate on dividends is scheduled to increase to 39.6% as the so-called Bush tax cuts expire.


But that's not all. Also starting in 2013, all or part of the net investment income, including long-term capital gains and dividends, collected by higher-income folks can get socked with an additional 3.8% "Medicare contribution tax." Therefore, the maximum federal rate on long-term gains for 2013 and beyond will actually be 23.8% (versus the current 15%) and the maximum rate on dividends will be a whopping 43.4% (versus the current 15%). Yikes!


The additional 3.8% Medicare tax will not apply unless your adjusted gross income exceeds: (1) $200,000 if you're unmarried, (2) $250,000 if you're a married joint-filer or (3) $125,000 if you use married-filing-separate status. (Post continues below.)

The additional 3.8% Medicare tax will apply to the lesser of your net investment income or the amount of adjusted gross income in excess of the applicable threshold. Net investment income includes interest, dividends, royalties, annuities, rents, income from passive business activities, income from trading in financial instruments or commodities, and gains from assets held for investment like stock and other securities. (Gains from assets held for business purposes are not subject to the extra tax.)


For example, a married joint-filing couple with adjusted gross income of $265,000 and $60,000 of net investment income would pay the 3.8% tax on $15,000 (the amount of excess adjusted gross income). If the same couple has adjusted gross income of $350,000, they would pay the 3.8% tax on $60,000 (the entire amount of their net investment income).


$2,500 cap on health care FSA contributions

Right now, there's no tax-law limit on contributions to your employer's health care flexible spending account (FSA) plan (although many plans impose their own limits). Amounts you contribute to the FSA plan are subtracted from your taxable salary. Then you can use the funds to reimburse yourself tax-free to cover qualified medical expenses. Good deal!


Starting in 2013, however, the maximum annual FSA contribution for each employee will be capped at $2,500.


Higher threshold for itemized medical expense deductions

Right now, you can claim an itemized deduction for medical expenses paid for you, your spouse and your dependents, to the extent the expenses exceed 7.5% of adjusted gross income.

Starting in 2013, the hurdle is raised to 10% of adjusted gross income. However, if either you or your spouse is age 65 or older at year-end, the 10%-of-adjusted gross income threshold will not take effect until 2017.


More on SmartMoney and MSN Money:

Jun 29, 2012 10:28PM
How about we address the issues that are inflating the cost and quality of health care instead of creating more entitlement programs that will continue to bloat our government, create more bureaucratic inefficiencies and continue our slippery slide towards socialism and the end of this great country as we know it!
Jul 1, 2012 3:16PM

You have been listening to Pelosi too much. What you will really find is that health care availability will drop, the quality will drop, and the facilities and advancements will slow. You will stand in longer lines and waste many hours in hopes of seeing a doctor and if you don't, come back the next day and try again.


When was the last time you saw the government get involved with anything that worked or got better. This will become the worst example yet.

Jul 4, 2012 6:23PM

I have been paying hefty premiums to insurance company for more than 15 years as they kept increasing my premiums although me and my family(myself, wife, 2children 14 and 12yrs old) were healthy all these years and never had any medical issues till 2010 when my son had to undergo a minor surgery (outpatient) and the insurance gave me very hard time as they refused coverage and I had to hire a lawyer. The insurance company found somewhere in the doctor's notes describing probable root causes for the ailment listing "congenital defect" as one probability among several others. It was a nightmare fighting with these powerful insurance companies. Soon after that they raised my premiums significantly. I was paying close to $1000 per month till beginning of this year. Suddenly in May I received a letter informing me that due to Obama's healthcare act, they are reducing my premiums effective July2012 to $789 per month. Couple of days later my attoney informed me that the insurance company has agreed to cover my son's surgery expenses and last week I received the first check of $7609.51 from them. My attorney told me that the insurance company gave up due to a clause in Obama' Healthcare law which will take effect next year and they did not want to go to court in future for a potential discrimination law suit which my attorney was planning to file against them. I called my insurance company yesterday for the second check and learned that all their customers will receive a refund check in August as required by Obamacare because the insurance companies were charging high premiums and inflating their administrative costs and paying unimaginable amounts of money to it's CEOs, Directors etc.

  I am an independent and do not agree with all the policies of the Left or Right. But I think one of the best things that has hppened to our country is Obamacare. All these two years I was blaming my health insurance problems on this administration. I finally read the law in detail and to my surprise more than 95% of the bad things being propagated about Obamacare are not true at all. If I had not had a personal situation and come to know the truth, probably I would also have been among the  crowd spreading confusion. 

  The true synopsis of the law is:

   1. Everybody's insurance premiums will go down and they will get refunds

    2. Everybody will get health insurance and no one will get denied for pre-existing conditions

    3. Everybody will be able to retain their current doctors, hospitals etc.and insurance plan

    4. Elderly people will no longer suffer due to lack of health care

    5. Companys' will get tax breaks to provide More workers with healthcare insurance

    6. The quality of healthcare will incresae and insurance company's will be more customer oriented and patient friendly instead of just being profiteering company's and cheating consumers. Their approach has already started changing. Claims are settled faster now, denial rates are decreasing.

     7. Obamacare doesnot increase any deficit, in fact it reduces debt.


      Read the law little bit and you will learn the truth. However it doesnot work for following people:

     1. Insurance and drug companies and their supporters

      2. Rich people who want to have a free ride (apprx. 1% of our population)

      3. hospitals and doctors and labs who were overcharging or involved in fraudulent charges

             If anyone falls in any these 3  ctegories, 99% of the nation should only feel sorry for you and hope that you will change and will be soon one of us  true Americans.



How about the fact that the IRS will e tied to the penalties/tax and they will come after those that don't pay. Inflation rises, but the minimu wage really doe not. the democtatic Govenor Martin o'Malley called those that do not, or can not pay for their medical insurance "Free loaders". How are the people to pay for yet another mandated insurance when some can not even afford to eat at no fault of their own. No insurance then face the IRS. Just more taxes. The car insurance companies have outrageous fees, medical is not different.


How about all the existing  planned parethood clinics be converted into basic medical care clinics for the ntire U.S men, women, and children. They are already staffed and HAVE A TON OF FUNDS.Let's use said clinics for the majority, can we all agree on that?


Religious freedom has been lost, border control agent killed, and Obama is shopping for campaign funds outside of the U.S. What is he promising for said funds? fI he doesn't like something, or want his secrets keep quiet he pulls an executive order. He has a hit list for those that go againest him. He talks about his support to military, but what happen to the military person that spoke out againest him? Our military fights for our freedom, but Obama has steadily taken that way from us. This is not the democracy we hope for..............


We are losing our voice, our democracy to a dictatorship which is when we all will lose.

Jul 4, 2012 1:03PM
Is it true that there's a 3.8% sales tax when you sell your home that you have to pay the government that Obama hid in his healthcare bill and it takes effect in 2013 -- after the election.  If so, then no matter your income level, everyone has to pay this government sales tax when you sell your home so you can help pay Obamacare.  Wake up people.  You've been duped by the democrats because this is hidden in the healtcare bill.
Sep 24, 2012 9:30AM
To the individual who refers to their christian values and large pocketbook:  I am glad you have enough money to go around and be in the positon to pick and choose who you would like to "help out."  You probably have a 401(k(), Roth or savings and probably have CD's, mutual funds and stocks and bonds.  You are fortunate to have a well paying job and these benefits, however,   I live in a very low income county where there is little industry and few job opportunites.  No taxis, trains or buses.  Very few of us can afford insurance if the employer doesn't offer insurance.  To find a job out of town would require an hour commute!  So, there goes any increase in pay in gasoline and wear and tear on our already high mileage vehicles.  We are getting by but uanble to save for our children's college, or retirement.  We are not asking for a hand-out, a tax break, or food stamps.  We are hard working folks like most everyone in our county and state (Ohio).  We are'nt complaining and whining like the richer's my money and no one can tell me what to do with it mentality!  We just expect fairness. (BTW:  I am a  Catholic and 54 yrs old with 3 children, 1 -20yrs old, 1 -12 yrs old, and 1- 13 yrs old-the one who is type 1 diabetes which requires a life time of insulin and pricks to check blood sugar levels.)
Jul 3, 2012 3:48PM
This tax affects those who make more than $200-250,000 per year.  The average income for a family of 4 in Ohio is around $38-$45,000.  So, this affects the folks who have more money to go around.  Paying your fair share is FAIR.  Allowing the $200k or more to write off one thing after another with all of the available loopholes only benefits the few.  The pie is huge and everyone gets a piece. Paying your fair share is the only way the less fortunate who cannot "write off" anything or little to nothing is fair at the end of the day.  Be realistic and consider that while the upper class doesn't want to be my brother's keeper, the christian faith expects that you help out the less fortunate and stop complaining.  We all work for a living.  Some get paid more; some get paid less, but we all work for a living.
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