By now, you should be aware of two important, looming deadlines:
End of open enrollment: March 31
Taxes Due: April 15
What you might not be aware of are the many connections between taxes and health care, particularly with the reform. Did you know that when the Patient Protection and Affordable Care Act (PPACA) was passed, the revisions specified various tax changes that will be implemented over the span of 10 years, beginning in 2010?
We’re already four years into it! Here are a few of the highlights to tax changes over the past four years:
- Tanning Tax: Beginning July 1, 2010, individuals were taxed an extra 10% for using ultraviolet indoor tanning services. It’s unfortunate for us Midwesterners…we can’t all live in tropical climates and get our vitamin D year round!
- Prescription drug rebate: A one-time $250 prescription drug rebate to help address the gap in drug coverage for people on Medicare helps seniors pay drug costs until the “donut hole” is fully eliminated in 2020.
- Limits on tax-free medical accounts: You can’t use a flexible spending account (FSA) to buy over-the counter drugs but your prescription drugs are still covered.
- Penalties for misuse of Health Savings Accounts (HSAs): There is a 20% penalty for using your HSA to buy non-qualified products, such as a new computer or interior decorating. Instead, you should really be using it for health- and medical-related expenses.
- Cap on flexible spending account (FSA) contributions: A $2,500 cap on contributions to FSAs went into effect last year. Any contributions made above the cap level are now a part of your taxable income. As the cost of living increases, so will the cap limit.
- Limits on medical deductions: You used to be able to itemize deductions on your yearly taxes to deduct out-of-pocket medical expenses that exceeded 7.5% of your income. Last year, out-of-pocket expenses had to exceed 10% of your income, for filers under age 65.
This year, 2014, is full of new changes. Americans are required to have health insurance. If you’re not covered by an employer plan, a military plan, or by Medicare or Medicaid, you’ll need to shop for your own plan on the Marketplace.
Of course, for the government to monitor and track that everyone is complying with the new laws, the IRS is stepping in. It requires you to report the value of your health plan on your tax return. If you don’t have coverage in 2014, you may see a penalty on your tax return filed in 2015.
Here’s a breakdown of how this will work:
- W-2 form: This year, you may have seen a new number on your W-2 form. The number is how your employer reports the value of your health plan to the IRS, if you receive coverage through your employer. This key figure will determine if you’re eligible for tax credits or liable for tax penalties.
- Health plans aren’t income: It might seem confusing that your health plan is reported on your W-2, but just to clarify, it’s not taxable. That means on your tax return you don’t need to report it as income.
- Penalties: If you don’t have health care coverage, you could be subject to the health care penalty on your tax return filed in 2015. It starts at $95 or 1% of your income (whichever is greater) per person for the 2014 tax year. The penalty will gradually rise until it hits $695 or 2.5% of your income (whichever is greater) per person for the 2016 tax year.
- Tax credits for low-income filers: If you can’t afford health insurance, you may be eligible to receive tax credits to help you pay the cost of coverage.
For more information on tax credits (and penalties) check out our free brochure 9 Things You Need to Know About the Affordable Care Act.
For more information about taxes and health care reform, check out this interactive tool provided by TurboTax: Are you covered in 2014?