Pay attention – new taxes, penalties coming with Obamacare

We’re talking accounting today.

You’re already bored, aren’t you?

But you’d better look alive, because the taxes we’re describing relate to the Affordable Care Act, or Obamacare. The federal health insurance-reform law contains nearly 20 new taxes and fees on everything from tanning-bed salons to biofuels. There are also new credits for small businesses and individuals who buy coverage.

The idea behind the levies is to raise billions to cover those credits. Some of the taxes are relatively targeted or obscure. We’ll stick here with the ones you’re most likely to see on your individual or business return. And if you’re breathing, you probably will see differences when you file in 2014 and beyond, whether it’s a tax based on your Roth individual retirement account rollover or a tax credit for you or your small business.

“It’s important for people to know before the end of the year what they’re looking at tax-wise so they don’t have surprises,” said Troy Crowther, a tax principal with local CPA firm Piercy Bowler Taylor &Kern. “And I think there probably will be some surprises out there come April.”

APRIL RETURNS BRING SWIFT CHANGES

People who file federal income-tax returns this spring are at the front line of Obamacare-related tax tweaks.

Start with higher levies on Medicare taxes and investment income. Single filers who make more than $200,000 a year, or joint filers who bring home more than $250,000, will see a 0.9 percent Medicare surtax on top of the existing 1.45 percent Medicare payroll tax. They can also expect to pay a 3.8 percent Medicare tax on unearned income such as investment dividends, rental income, interest and capital gains on property.

Throw in 2013’s increase in the highest tax bracket from 35 percent to 39.6 percent, and higher-end earners could be looking at an effective tax rate of 43 percent, said Chris Wilcox, a shareholder in local CPA firm Johnson Jacobson Wilcox.

Together, the Medicare surtax and investment taxes should raise $209 billion over the next decade, according to federal estimates.

OK, so most people don’t even come close to netting $200,000 a year. But this rule could still affect you, accountants say. That’s partly because it could rope in small-business owners who pass profits and losses through to their individual tax returns.

“If you take money out of people’s pockets, that’s less they have to invest in their business,” said Bill McCarthy, a partner in local accounting firm McCarthy Kaster CPAs. “It downsizes money that could be spent in the economy, hiring employees or buying equipment.”

What’s more, simple investment decisions could cost you a huge amount, even if your salary falls below $200,000 or $250,000. Say you take home $150,000 a year, and you borrow $75,000 from your 401(k) for a down payment on a home. That early withdrawal is considered income, Crowther said, and taking it will push you to $225,000. Or if you earn $100,000 a year, and you roll over a $100,000 traditional, untaxed IRA into a taxable Roth IRA, then boom — you’re at $200,000.

Other changes for high-earners include a jump in the capital gains tax from 15 percent to as much as 23.8 percent and cuts in personal exemptions and itemized deductions. That latter rule recently helped persuade one client to eliminate a $50,000 charitable contribution, Wilcox said.

People at all income levels will see new limits on how much of their medical expenses they can deduct, and how much they can contribute to pretax, flexible spending accounts to cover expenses such as eyeglasses, braces, or tuition for their special-needs kids.

But Obamacare isn’t all tax, all the time. There’s an expanded tax credit on the way for small businesses that buy health insurance for employees. Companies with fewer than 25 employees earning an average of $50,000 per year or less could qualify as long as they pay at least half of their workers’ premiums. The credit could be worth as much as 50 percent of your coverage contribution in 2014 and beyond, although only businesses with around 10 employees get the full credit.

Local accountants say the credit’s early, smaller version, worth up to 35 percent of coverage costs from 2010 to 2013, hasn’t gotten much play from business owners. That’s because figuring it out requires a lot of record-keeping and paperwork, and that can pretty much wipe out savings.

“You might save $2,000, but the cost to calculate that is $1,000,” McCarthy said.

Wilcox said one client he crunched numbers for ended up with a $900 credit.

“The time and resource to make that calculation is just not even beneficial to the taxpayer,” he said. “It sounds really good on paper, but in reality, it is so limited that I’m seeing very few small businesses even able to take advantage of it.”

Wilcox and Crowther said they have no clients who’ve taken the credit. McCarthy added that 160,000 of the 4 million small businesses projected to take the subsidy have actually applied for it.

Two significant new fees and one big tax credit don’t take effect until Jan. 1, so they’ll affect returns filed in spring 2015. That might seem a ways off, but accountants say you should start thinking now about how your incomes and expenses will look in 2014.

PENALTY TAKES EFFECT IN NEW YEAR

The first major new cost is, of course, the individual mandate. Go without coverage after Jan. 1, and you’re looking at an annual penalty of $95 or 1 percent of your income, whichever is bigger. So if you make $30,000 a year, you’ll pay $300. The penalty increases each year through 2016, when it maxes out at $695 or 2.5 percent. That’s $750 on a $30,000 salary.

If you don’t have insurance on Jan. 1, you’ll have to wait until October to enroll. You can’t buy coverage if you get sick midyear, unless you have a qualifying event such as a new baby or loss of job-based insurance. Then, you can enroll after a waiting period of up to 45 days, and your individual fine is pro-rated. Enroll in July, for example, and you’ll be on the hook for half of the penalty.

The Internal Revenue Service will take the penalty out of any refund, although some people are changing their withholding status to try to avoid paying.

The penalty could eat into consumer spending, Wilcox said, because filers often use their refund to buy electronics, make home improvements or put a down payment on a car.

For consumers who buy coverage, tax credits could ease the pain. If you’re single and make less than $45,960 a year, or if your household of four earns less than $94,200, you’ll qualify for a subsidy, although the subsidy phases out considerably as incomes approach the threshold.

The tax credit could have an unforeseen consequence. Crowther said he expects many people who previously haven’t filed taxes to begin filing, because you have to provide two years of prior returns to collect the subsidy. For businesses, the biggest overall change in 2014 will be a reinsurance fee of $63 per insured person. The fee, designed to raise $25 billion to pay insurers for selling coverage to people who are considerably sicker than average, would run through 2016. The Obama administration has proposed exempting some self-insured plans, such as union-sponsored policies, from the tax.

The tax isn’t raising too many eyebrows among McCarthy’s clients, at least.

“I’m not hearing a lot of blowback on it,” he said. “Certainly, if you have 100 employees and you owe $6,300, that’s not a pittance. But it pales in comparison to the employer mandate.”

That mandate is by far the largest tax looming in the more-distant future.

EMPLOYER COVERAGE MANDATE COMING

The employer coverage mandate will cost noncompliant companies from $2,000 to $3,000 per worker after Jan. 1, 2015. The penalty is smaller if a company doesn’t offer insurance at all; bigger if it provides coverage lacking Obamacare’s essential health benefits.

The employer and individual mandates should raise $65 billion over 10 years, based on federal forecasts.

Because the employer mandate is more than a year away, it’s hard to predict how it would affect the economy.

You’ve probably seen media reports about companies cutting hours and shedding workers to fall below the rule’s 50-worker threshold, or weighing canceling coverage altogether because the fine is cheaper than premiums.

McCarthy said he has a “bad feeling” that tens of millions of Americans insured through work will lose their coverage.

But Crowther said he thinks many companies will hang onto their plans. For starters, the penalty isn’t tax deductible, while premiums are. And any business that provides coverage to compete for the best workers will still have to do so, he said.

“When people talk to me about dropping insurance, I ask them, ‘Do you offer insurance now?’ Most of them say they do. The question then is, ‘Well, right now, you don’t have to. Why are you doing it?’ For whatever reason you’re doing it, that reason doesn’t change.”

Even considering the potential fines, the biggest cost of Obamacare isn’t the employer mandate, or any other specific tax, accountants said. Rather, it’s ambiguity, and the record-keeping requirements that come with thousands of pages of new regulations that aren’t consistently applied.

“It’s tough to measure, but there’s been so much uncertainty as far as how people plan for the law,” McCarthy said. “Would the Supreme Court uphold it? Would Obama get re-elected? And then there’s the fact that they keep changing it with carve-outs, exemptions and delays. How do you plan? That’s the biggest cost. People don’t know what or where their costs are going to be, going forward.”

Contact reporter Jennifer Robison at jrobison@reviewjournal.com. Follow @J_Robison1 on Twitter.