How Obamacare Will Affect Your Taxes
NEW YORK ( MainStreet) The Patient Protection and Affordable Care Act, popularly known as "Obamacare," is one of the most controversial laws to be passed in recent memory; people either seem to love it or hate it. However, where you stand on the issue won't change the fact that Obamacare might affect your taxes. Before you sit down and file, you need to know the impact that the new law is going to have on your relationship with the IRS.
Obamacare and Your Tax Refund
Two things that nearly everyone knows about Obamacare: it carries an individual mandate that requires almost everyone to have some kind of health insurance, and furthermore, there is a penalty imposed and collected by the IRS against those who do not get health care coverage.
However, how this fine (equivalent to $95 or 1% of your taxable income, whichever is greater) actually gets collected isn't entirely clear.
"They collect the fine out of your tax refund," explains Lydia Glatz, CPA, senior manager at Morrison, Brown, Argiz and Farra. What happens if you don't get one? "There is currently no collection method in place other than garnishing a return," Glatz said.
Next year, that penalty increases to 2% or $225, before finally going up to $695 or 2.5%. What's more, that's per person, with a smaller, but no less significant charge for children.
New Taxes Under PPACA
It's not just the fine that might impact your tax return, however. Obamacare also comes with new taxes to chip away at your bottom line. Pat Connolly, CPA, MST, a partner at Boston's BlumShapiro, points out that for some individuals with higher income, there's an additional tax of 0.9%. What's more, there's a further tax on unearned income, such as dividends, to the tune of 3.8%.
"That can have more of an impact on a self-employed person," he explains.
John-Paul Valdez, a financial advisor and tax expert for Pearl.com, is less worried about the impact of Obamacare on your taxes.
"There's only going to be a tiny sliver of people paying the penalty," he says. "And most of those people are probably going to pay more than if they had just bought insurance."
What's more, he points out that the Social Security tax only applies to the first $100,000 of income.
"Even if you make $20 million, you're still only paying a tax on that first $100,000," Valdez said.
Obamacare and Deductibles
Valdez further explains that your health care spending is deductible.
"Built into your premium is the premium tax credit that's going to bring your premium down," he says. Further, buying health care is an above-the-line deduction, which allows you to reduce your taxable income. If you're at or near a higher tax bracket, this can make a huge difference.