ACA – Individuals

Tax Changes for Individuals

The health-care reform legislation contained a number of tax changes. Some of these changes take effect immediately; others won’t have an impact for a few years. Here’s a year-by-year breakdown of some of the changes worth taking note:


  • A 10 percent tax assessed on amounts paid for indoor tanning services after July 1, 2010.

Adoptive parents

  • Maximum tax credit for qualified adoption expenses, and the maximum amount of employer-provided adoption assistance that can be excluded from income is $12,650 in 2012.
  • The Federal Adoptive Tax Credit is set to expire at the end of 2012.
  • In 2013, the maximum adoption tax credit is $6,000 and only pertains to families adopting children with special needs.
  • The tax credit is  non-refundable.

Tax health coverage benefits extended to children

  • Covered by an employer health plan, associated with the health coverage and any reimbursements you receive for medical care expenses are extended to children who have not reached age 27 by the end of the year.
  • Self-employed individuals can deduct the costs associated with health-care coverage for any child who doesn’t reach age 27 by year-end.

2011 through 2013

Over the counter medications
If you have a flexible spending arrangement (FSA), health reimbursement arrangement (HRA), health savings account (HSA), or Archer medical savings account (Archer MSA)

  • Over-the-counter medications (except for insulin and medications that are prescribed by a physician) will no longer a qualified medical expense for purposes of reimbursement and tax-free distributions.
  • Starting in 2011, the additional tax that applies to HSA and Archer MSA distributions that aren’t made for qualifying expenses increases to 20 percent.
  • In 2013, health FSAs that are part of a cafeteria plan will be capped at a $2,500 reimbursement limit.

Do you itemize your deductions on Schedule A?

  • 2013 unreimbursed medical expenses will be deductible on Schedule A only to the extent that they exceed 10 percent of adjusted gross income (AGI), instead of the 7.5 percent threshold that applies now.
  • Until 2017, however, if you or your spouse turns age 65 before the end of the taxable year, the 7.5 percent AGI threshold will continue to apply.
  • Beginning in 2017, the 10 percent AGI threshold will apply to individuals who have reached age 65 as well.

2013 Medicare taxes

You probably have some familiarity with the Federal Insurance Contributions Act (FICA) employment tax.

  • The old age, survivors, and disability insurance (OASDI) portion of this FICA tax is equal to 6.2 percent of covered wages.
  • The hospital insurance (HI) portion of the tax (commonly referred to as the Medicare payroll tax) is equal to 1.45 percent of covered wages, and is not subject to a wage cap.
  • FICA tax is assessed on both employers and employees (that is, an employer is subject to the 6.2 percent OASDI tax and the 1.45 percent HI tax, and each employee is subject to the 6.2 percent OASDI tax and the 1.45 percent HI tax on wages as well), with employers responsible for collecting and remitting the employees’ portions of the tax.

Self-employed individuals

  • Responsible for paying an amount equivalent to the combined employer and employee rates on net self-employment income (12.4 percent OASDI tax on net self-employment income up to the taxable wage base, and 2.9 percent HI tax on all net self-employment income), but are able to take a deduction for one-half of self-employment taxes paid.

Beginning in 2013

  • Health-care reform legislation increases the HI tax on high-wage individuals by 0.9 percent (to 2.35 percent).
  • Married and filing joint federal income tax return, the additional HI tax will apply to the extent that the combined wages of you and your spouse exceed $250,000.
  • Married but file a separate return, the additional tax will apply to wages that exceed $125,000.
  • All others, the threshold is $200,000 of wages.
  • In 2013, a single individual with wages of $230,000 will owe HI tax at a rate of 1.45 percent on the first $200,000 of wages, and HI tax at a rate of 2.35 percent on the remaining $30,000 of wages for the year.

Employers will be responsible for:

  • collecting and remitting the additional tax on wages that exceed $200,000. (Employers will not factor in the wages of a married employee’s spouse.)
  • You’ll be responsible for the additional tax if the amount withheld from your wages is insufficient.
  • The employer portion of the HI tax remains unchanged (at 1.45 percent).


  • Additional 0.9 percent tax applies to self-employment income that exceeds the dollar amounts above (reduced, though, by any wages subject to FICA tax).
  • If you’re self-employed, you won’t be able to deduct any portion of the additional tax.

Also beginning in 2013:

  • A new 3.8 percent Medicare contribution tax will be imposed on the unearned income of high-income individuals (the new tax is also imposed on estates and trusts, although slightly different rules apply).
  • The tax is equal to 3.8 percent of the lesser of your net investment income (generally, net income from interest, dividends, annuities, royalties and rents, and capital gains, as well as income from a business that is considered a passive activity or a business that trades financial instruments or commodities), or your modified adjusted gross income (basically, your adjusted gross income increased by any foreign earned income exclusion) that exceeds $200,000 ($250,000 if married filing a joint federal income tax return, $125,000 if married filing a separate return).

You will only be subject to the additional 3.8 percent tax if your adjusted gross income exceeds the dollar thresholds listed above.

Interest on tax-exempt bonds, veterans’ benefits, and excluded gain from the sale of a principal residence that are excluded from gross income are not considered net investment income for purposes of the additional tax. Qualified retirement plan and IRA distributions are also not considered investment income.

Together, these two new Medicare-related taxes are expected to provide a major source of revenue to finance other parts of health-care reform.


A new premium assistance tax credit will help eligible individuals purchase health-care insurance through one of the newly established state exchanges. If you qualify for the credit, it will be paid directly to the exchange insurance plan that you join.

Who qualifies?

  • Individuals with household income between 100 percent and 400 percent of the federal poverty level will qualify, with the exact amount of the credit based on income level.
  • Individuals who are offered coverage through an employer health plan won’t qualify for the credit unless the employer health plan doesn’t cover an adequate share of benefits (60 percent), or it’s considered “unaffordable” (the employee portion of the premium is 9.5 percent or more of the employee’s household income).

In addition to a premium assistance tax credit:

  • Those with household income between 100 percent and 400 percent of the federal poverty level may qualify for a cost-sharing subsidy to help cover out-of-pocket costs, like co-payments and deductibles, when they buy health insurance through an exchange.
  • Like the tax credit, the subsidy will be paid directly to the plan.

Beginning in 2014 – 

  • You’re a U.S. citizen or legal resident, you are required to have adequate health-care coverage.
  • A penalty tax will be imposed for non coverage.
  • 2014, the tax will equal the greater of 1 percent of the amount of your household income that exceeds a specific amount (generally, the standard deduction plus personal exemption amounts you’re entitled to for the year)
  • or $95 per uninsured adult (half that for uninsured family members under age 18), with a maximum household penalty of $285.
  • By 2016, the percentage rate increases to 2.5 percent, the dollar amount per uninsured adult increases to $695, and the maximum household penalty increases to $2,085.

To assist you in understanding these new questions regarding these and other health tax related issues, contact us today for an appointment.