The Patient Protection and Affordable Care Act (commonly called ACA or Obamacare) continues to bring changes to the health insurance industry.
The open enrollment period starts on November 15, 2014 and runs until February 15, 2015.
By the end of the enrollment period, most individuals (U.S. Citizens and legal residents) younger than 65, must have health insurance or potentially pay a mandate penalty.
We provide below ACA update information and specifically how this act impacts higher income families.
Basic ACA Penalty Information
The mandate penalty increases in 2015. The IRS computes this for individuals and families as follows.
In 2015, individuals not insured by an ACA-compliant plan must pay a fine of $325 or 2% of income (whichever is larger).
For families the penalty for each adult in the family is $325 per adult or 2% of income, (whichever is greater) plus a $162.50 fee for each child.
ACA Continues to Tax High-income Individuals
If you earn more than $200,000 or you and your spouse report more than $250,000 on a joint return, you will pay a hospital insurance (HI) fee. The HI fee is 2.35% on adjusted gross income (AGI) above certain thresholds (see chart below).
For example, a single tax payer with an AGI of $300,000 will pay an extra 2.35% on $100,000 (the amount over the $200,000). A couple filing jointly and reporting an AGI of $300,000 will pay 2.35% on $50,000 (the amount over $250,000).
Below is a chart from the IRS on the high income thresholds for higher Medicare Taxes
ACA Tax on Net Investment Income for High Income Earners
In addition, high-income earners must pay tax on net investment income (NII). This investment income tax is 3.8% on the lesser of the following items.
• The individual’s net investment income
• Any excess of an individual’s modified adjusted gross income over specified threshold amounts (see chart above)
This component of the ACA, taxes net investment income from interest, dividends, annuities, royalties and rental properties, basically income from any activity that is not an “ordinary” operation of a business. The ACA NII tax excludes S-Corp and partnership income.
ACA Tax Planning Strategies for High Income Earners
Since the ACA taxes net investment income, you may want to evaluate not only what investments you own, but also where you own them. For example: if you own investments, which generate income (or capital gains), you might want to place those investments in a tax-sheltered account, such as a 401(k).
Under the current ACA law, you do not pay tax on any appreciation, interest or dividends accrued in a tax-sheltered account. You only recognize those gains (for the purposes of taxes) when you withdraw the funds.
If you expect to make less income in retirement and you do not have a short-term need for the invested funds, this strategy could work for you.
If you will need your invested money for a short-term need, you do not want to place that money in an account, which incurs a penalty for early withdrawal.
TPI Provides Tax Strategies to High Income Earners
Each individual’s situation is unique. You should consult a tax advisor before making any changes. If you have questions on how to handle your investments with regard to the ACA, please contact us.
TPI specializes in helping high income earners in the Virginia, Maryland and Washington DC area minimize taxes with IRS tax-compliant strategies. We provide an array of services including accounting, setting up retirement plans, and establishing corporate entities.
With our range of investment and tax planning services, the TPI team can identify the best way for you to position your assets to minimize your taxes.
We provide free no-obligation review of your tax filings to insure you are capturing all possible tax reduction strategies. Please contact us to set up an appointment.