This year's tax changes rank among the most significant in recent memory. High-income Americans will pay at the highest rate in nearly two decades and will fork over more in Medicare taxes to boot.
Meanwhile, Obamacare gets into full swing in 2014 and will have a corresponding impact on the taxes of millions of Americans when they file returns in 2015.
Matthew L. Carey, director of the Center for Financial Market Studies at the Hagan School of Business at Iona College in New Rochelle, N.Y., outlines the changes in the following interview.
In 2013, a lot of taxes were raised -- from an increase in the top income tax rate to a new Medicare surtax on the wealthy. In your opinion, what are some of the most significant increases, and how will they impact taxpayers?
Indeed, 2013 began with the first categorical income tax increases in two decades. Income tax rates for the highest wage earners increased, while rates for most others held steady.
Taxes on dividends and capital gains were raised for some taxpayers, and the temporary rollback in the Social Security payroll tax was allowed to expire.
The alternative minimum tax is now (finally) indexed for inflation, lessening the risk of potential tax burdens for some taxpayers.
Among other changes rolled out in 2013 were an increase in the estate tax, new limits on use of exemptions and deductions for upper income taxpayers, and a new Medicare tax on unearned income.
2014 is the year that Obamacare finally makes its full impact. What are the tax implications for the average citizen?
The average citizen (as opposed to the higher-income taxpayer) will not see too much of a difference in his or her taxes as a result of Obamacare. Most will be exempt from the new Obamacare Medicare taxes because their MAGI (modified adjusted gross income) will not exceed the required thresholds, or they have no net investment income to report.
Those taxpayers with moderate incomes who purchased health insurance coverage through the Health Insurance Marketplace between Oct. 1, 2013, and March 31, 2014, may be able to lower their monthly premium through an advance payment of the Premium Tax Credit.
The itemized medical expenses deduction threshold has changed for most people. You can deduct your unreimbursed medical and dental expenses that exceed 10 percent -- (which was) previously 7.5 percent -- of your adjusted gross income on your 2013 tax return. The 7.5 percent threshold will remain for those 65 and older for tax years 2013 through 2016.
Citizens who do not have health insurance in 2014 and don't meet the criteria for an exemption will wind up paying the Obamacare penalty in 2015, which the IRS calls the "Individual Shared Responsibility Payment." Note the absence of the word "tax."
A lot of people seem to be confused about how the Obamacare tax subsidy will work. Can you explain how the subsidy will be paid out and how it will be treated on an individual's tax return?
The Affordable Care Act provides government subsidies -- the government calls these the "Premium Tax Credit" -- to certain eligible consumers beginning in January 2014. The goal of these subsidies is to make individually purchased health insurance more affordable for households with annual incomes below thresholds specified by the law.
Health care consumers earning less than 400 percent of the federal poverty level -- about $46,000 for a single person, or $94,000 for a family of four -- may be eligible for a government subsidy to help them buy coverage in 2014.
If it's determined that you are eligible for a government subsidy during the application and enrollment process, you will have the option to:
- Get it now: Have some or all of the estimated credit paid in advance directly to your insurance company to lower what you pay out of pocket for your monthly premiums during 2014.
- Get it later: Receive the credit instead when you file your 2014 federal tax return in 2015.
Subsidies for 2014 are based on your modified adjusted gross income for 2014. You should use your best estimate of what your household MAGI for 2014 will be. Any discrepancy in the amount of subsidy you were due and the amount you actually received will be reconciled in your 2014 federal tax return.
What is the tax penalty for not buying health insurance? How will that be assessed?
You call this a tax penalty; the IRS calls it "the Individual Shared Responsibility Provision." The provision went into effect on Jan. 1, 2014. It applies to each month in the calendar year. The amount of any payment owed takes into account the number of months in a given year an individual is without minimal essential coverage or an exemption.
The basic penalty is $95 in 2014 if you:
- Are single.
- Have no dependents.
- Have income less than $19,500.
If income is higher, a penalty is assessed as a percentage of income.
If you owe the penalty, you are supposed to pay it with your income tax return. The ability of the IRS to collect, however, is a much-debated question.
Although the penalty is assessed through the tax code, it is not subject to the enforcement provisions of the tax code. The ACA's drafters specifically barred the IRS from applying criminal penalties, property seizures, or liens and levies. So, they cannot throw you in jail or garnish your wages. Basically, they can only deduct the penalty from your refund.
If a penalty does not come out of a refund, don't think it just disappears. The penalty will be carried over to the following year's tax filings and held on the filer's account. And people should understand that the IRS is also allowed to charge interest (about 3 percent currently) on any unpaid tax.
Theoretically, if one wanted to challenge the mandate and game their tax return to avoid a refund and consequently avoid paying the penalty, they could. Penalties and interest on the unpaid amounts will accrue, but the IRS will remain limited in its ability to collect those amounts.
Inevitably, some folks will take this stand. So it will be interesting to see how the government ultimately addresses this in future years.
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