Effects of Obama Care on My Tax Liability

How Will This Effect Me?

The Affordable Care Act or as it has become known “Obama Care” that has gone into effect this year could have a big impact on your 2013 Tax Liability. The expansion of health insurance through mandatory coverage requirements for the millions of under or uninsured Americans has millions of Americans needing to get enrolled and other Americans facing new tax-related changes to help pay for it. These new tax-related changes will have an impact on all taxpayers of all income levels.

The biggest change in your Tax Liability will come in the form of a higher rate you will be responsible for in your Medicare Tax. In 2012, workers were responsible for 1.45% of their wages with their employers picking up a tab that matched that amount for a Tax Liability of 2.9%. Self-employed individuals were responsible for the entire amount of 2.9%. Let’s remember that there was once a limit to the amount of Medicare Tax withheld. Like that of Social Security withholdings, since 1994, the limits on Medicare taxation were removed entirely. As we will see, joint fillers with work-related earnings greater than $250,000 will be responsible for an additional .9% in Medicare Tax. Employers are required to withhold the additional tax but they will have no knowledge of your spouses income, leaving you to make up the difference at years end.

Additional Medicare Taxes on Certain Individuals

  • Joint filers with wages or work-related income greater than $250,000 or singles earning more than $200,000 will see their Medicare tax liability increase by 0.9%. This will bring their total Medicare Tax Liability to 2.35% and their employers will match that increase for a total of 3.8%. Self-employed workers will be responsible for all of the 3.8% Medicare Tax.

  • Anyone with a total adjusted gross income greater than $250,000 for joint fillers and $200,000 for single fillers will now have their investment income taxed as well. On whatever the amount of investment that exceeds the $250,000 for Joint Filers and $200,000 for single filers gross income level, you will be responsible for the full 3.8% additional tax yourself.

The Net Effect

Those in the highest tax brackets will see their Tax Liability go from 39.6% to 43.4% This higher tax rate reflects the additional 3.8% Medicare Tax.

Lower Income Workers

If you are in a lower income bracket, don’t assume that Obama Care will not effect your Tax Liability. Although the effects of Obama Care on lower income levels is not as clear as higher Medicare Taxes, there are some changes that will be felt by lower income earners.  

  • New limitations on flexible spending arrangements will effect all taxpayers of all income levels. 
  • Limiting the amount you can set aside tax-free in a flex plan to $2,500 a year. 
  • Although most employers would limit the amount to $5,000, there was no actual limit to what you could set aside. 
  • This will effect those who have or will have a predictable high level of medical expense, costing hundreds of dollars in extra income by increasing the Social Security and Medicare withholding taxes.  

If you relied on deducting medical expenses, your tax break on this deduction has changed for the worse as well. Obama Care has raised the floor on itemized medical expenses from 7.5% of your gross income to 10%. This could have a substantial amount in your overall Tax Liability for 2103.

All in all the Tax Liabilty from Obama Care may sound overwhelming, but garvey & garvey LLC CPAs can easily assist business owners and employees with establishing a method that is appropriate for them so that there are no unwelcome surprises when the tax year ends.