ACA’s Tax Impact

The ACA includes a 3.8% tax on net investment income for families with modified adjusted gross income (MAGI) of more than $250,000 and individuals with MAGI exceeding $200,000. The tax is levied on the lesser of A) your net investment income or B) the amount by which your MAGI exceeds the above thresholds.

Net investment income includes taxable interest income, dividends, most capital gains, annuity income, royalties and passive income from a trade or business. Note that municipal bond interest, retirement plan distributions and income from a trade or business in which you play an active role are not included in net investment income.

That allows a few strategies that could help minimize your tax impact, says Michael Byrne, a senior financial planner in Northern Trust’s Tampa office. They include:

• Buying municipal bonds
• Investigating the costs involved in a traditional-to-Roth IRA conversion (indirect benefit from reductions in future MAGI)
• Meeting material participation thresholds in a trade or business.

The 3.8% Medicare tax on unearned income is in addition to a 0.9% Medicare tax on earned income that went into effect in January 2013. The additional 0.9% has been withheld from high-income wage earners’ income that exceeds the threshold – the same MAGI threshold that applies to the 3.8% tax.

Learn about the ACA's impact for business owners.

Closing the Gap for Health Insurance Costs

Robust health insurance is perhaps the single most compelling non-salary benefit provided by employers, particularly given the high cost of obtaining similar coverage on your own. The ACA closes the gap: It requires every American to carry health insurance and is intended to make individual policies more affordable for people seeking coverage through the new health care exchanges. That means more options for people under 65, who aren’t eligible for Medicare.

“This is an opportunity for pre-Medicare eligible people who may be inclined to retire or to start their own business, but who have been reluctant to do so because of the inaccessibility of health care coverage,” says Byrne. “This has been a bit of a hurdle for people to get over, and now the ACA has eased that up. If you’re on the fence, this is another consideration that may push you to accelerate your decision.”

That’s particularly true if someone with a pre-existing condition – who may have been uninsurable or who would have warranted especially expensive coverage prior to the ACA’s passage – is on your policy, says Byrne. Insurers participating in the exchanges cannot consider pre-existing conditions. Under the ACA, premium variations can only be determined by age, geographic region, family size and tobacco use.

Phaseout of the Medicare Part D “Donut Hole”

The Medicare Part D prescription drug plan includes cost-sharing measures designed to limit government spending on prescription drugs. The so-called “donut hole” was one of these cost-sharing measures. In 2014, Medicare recipients are responsible for the plan deductible, which is the first $310 in prescription drug costs. They are then responsible for 25% of the cost of prescriptions up to $2,850 (the plan pays 75%). For prescription drug costs between $2,850 and $6,455 (the donut hole), recipients are responsible for 72% of generic drug costs and 47.5% of brand-name drugs. Finally, they’re responsible for 5% of prescription drug costs above the $6,455 threshold. What’s the good news? The ACA phases-in a reduction in the recipient’s coinsurance payment rate within the donut hole to 25% for both brand-name and generic drugs by 2020.*

The Health Care Exchanges’ Balancing Act

One aim of health care exchanges is to drive young, healthy and inexpensive-to-insure Americans to obtain coverage, either individually or through their employers. (More employers are now required to offer coverage to more workers.) These relatively healthy workers are moneymakers for insurance companies, and the boon they represent to insurers is intended to balance out the higher costs of insuring an older, sicker population, keeping premiums down. The danger, says Byrne, is we don’t know if enough young people will purchase coverage to make the exchanges viable.

“Certainly the [ACA] is attractive for those who are older and less healthy. What’s unclear is if the penalties [for individuals who forgo coverage] are sufficient to get enough young people to sign up,” says Byrne. The penalties for individuals who don’t buy insurance are set to increase gradually over the next few years, beginning with the greater of 1% of household income or $95 in 2014, increasing to the greater of 2% of household income or $325 in 2015, then the greater of 2.5% of household income or $695 in 2016.

Byrne expects that by the end of 2014, we’ll have a better sense of the exchanges’ viability. “If you only have the older, less healthy population in the risk pool, insurers won’t be able to spread around the risk, and ultimately premiums would have to be increased significantly.”

*The Medicare Part D Prescription Drug Benefit, November 2013, The Kaiser Family Foundation - See more at: https://wealth.northerntrust.com/wealth-management/affordable-care-act-your-financial-impact#sthash.cTXW90cs.dpuf