How Will the Affordable Care Act Impact Your Finances?

The Patient Protection and Affordable Care Act was signed into law in 2010, introducing sweeping changes in the way healthcare in the United States is administered – and paid for. While many of its provisions do not roll out until 2014, the tax component of the Affordable Care Act is already in effect, and taxpayers should be prepared for how the new law will affect their finances.

What you should know:

1. Your tax bill for 2013 has already been affected by the Affordable Care Act.
  • Individuals who earn more than $200,000 ($250,000 for couples) in 2013 will pay a 0.9% increase in Medicare payroll tax.
  • Those same individuals will also pay a 3.8% Medicare tax on certain kinds of investment income, such as interest, dividends, capital gains and rental income.
  • It will be more difficult to deduct medical expenses this year, as the income floor these expenses have to exceed has risen from 7.5% of adjusted gross income to 10%. 
2. The financial impact of the Affordable Care Act extends beyond 2013.
  • Those who opt to not purchase insurance in 2014 may be subject to a penalty equal to the greater of $95 per family member or 1% of income. Those amounts rise to $295 and 2% in 2015 and $695 and 2.5% in 2016.
  • As of January 2015, larger businesses (i.e., those employing 50 people or more) that do not provide insurance may be penalized $2,000 per full-time employee beyond 30 employees.
  • Starting in 2018, health insurance companies will be assessed a 40% tax for high-cost, “Cadillac” health plans. Intended to discourage unnecessary hospital visits and tests, the controversial tax will be applied on health plans that exceed certain annual limits.
3. You may be able to mitigate the potential impact of higher taxes.
  • The income generated through municipal bonds is exempt from the new Medicare surtax and not considered when calculating the threshold for the 3.8% surtax.
  • Not only are Roth IRA distributions not subject to the 3.8% Medicare tax, they aren’t included when calculating adjusted gross income and can’t push other investment income into the tax.
  • Certain strategies, such as contributing to a retirement account, deferring compensation or directing IRA distributions to a qualified charity, may help keep you from exceeding income surtax thresholds.

What you should do now:

As the Affordable Care Act continues to roll out, investors would be well-served to consider how its tax provisions will affect their finances. A financial advisor who understands how these provisions will impact your financial goals can work with you and your tax professional to help ensure your portfolio is as well-positioned and tax-efficient as possible.

Robert W. Baird & Co. does not provide tax or legal advice. Please refer to your tax professional prior to implementing any tax strategies.