Obamacare tax changes effect high income taxpayers & their amount of taxes come later this year. Areas such as Tax Rate, Capital Gains & Dividends, Itemized Deductions, Phase-Out Rules, and Federal Estate Taxes will all be effected.

Healthcare Tax Changes

Higher-income taxpayers will be subject to many changes that will lead to an increased amount of taxes come April 15th. This is due to numerous factors that have been modified, such as:

  • Higher Income Tax Rate: As of 2014, taxpayers with a taxable income above $432,200, joint filers above $457,000, and heads of households above $406,750 are taxed at a 39.6% rate instead of 35%. This means that those with $150,000 above the threshold will pay $6,900 more.
  • Capital Gains and Dividends: The American Taxpayer Relief Act has increased the rate for long-term capital gains and dividends from 15% to 20%. This change signifies a 33.33% tax increase. It applies based on how much one’s income exceeds the above thresholds.
  • Obamacare Influence on Medicare Taxes: Due to the Affordable Care Act, taxpayers bringing in a higher income are required to pay 3.8% on net investment income based on adjusted gross income. For those paying this tax, the rate on net capital gains and dividends will increase to 23.8% and 43.4% on short-term capital gain. There’s also a 0.9% Medicare tax, which applies to self-employment income and employee compensation. In both of these cases, the income threshold is much lower ($200,000 for an individual or head of household, $250,000 for married couples filing jointly, and $125,000 for a married couple).
  • Pease Limitation on Itemized Deductions: For itemized deductions, the thresholds are $300,000 for married couples and widowers, $275,000 for heads of households, $250,000 for individuals, and $150,000 for those who are married but filing separately. The Pease limitation of the Taxpayer Relief Act decreases itemized deductions for a higher-income taxpayer by 3%. Casualty, investment interest, medical expenses, theft, etc. aren’t included.
  • Phase-Out Rules: The rules under the American Taxpayer Relief Act dictate that the exemptions that may be claimed by a taxpayer are reduced by 2% for each $2,500 by which a taxpayer’s gross income exceeds the threshold.
  • Federal Estate Taxes: Beginning 2013, the American Taxpayer Relief Act created a permanent maximum federal estate tax rate of 40%. For estates of decedents who die after December 31, 2012, there’s an annual $5 million exclusion which is adjusted for inflation. For couples, this can be merged to exclude $10 million. In 2014, the inflation adjusted level is $10.68 million.

Author: Apoorva Anupindi

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