Affordable Care Act Taxes


How Can the Government Afford Obamacare?

On the heels of an economic crash, how could the United States manage to overhaul it’s whole health system? The answer is by creating new taxes.

In order to afford the implementation of the federal health law, the Affordable Care Act, the government tweaked tax rules for certain groups of earners. Federal funding was provided to each state that started its own health insurance exchange and to those that increased Medicaid rolls under the ACA, in addition to the federal money spent building to serve the federally-run marketplaces in 36 states. Tax credits for eligible individuals and small businesses are also awarded, requiring more federal funding.

To successfully manage each of these expenses and improve the quality of care and access to coverage across the US, new taxes were created, and others were adjusted.

Taxes are already an important component of the law, as many individuals and small business owners will qualify for subsidies to discount coverage costs on the state insurance marketplaces. The subsidies are issued through the IRS, which is also responsible for asking you to report your insurance information on your annual tax return, beginning in 2015 for 2014 taxes. Seemingly unrelated in the past, healthcare coverage and taxes are now very much connected under the ACA. While no one likes a tax increase, at least these taxes are going to a good cause: keeping Americans healthy.


W-2 Forms

Box 12 Code DD

Box 12 is a recent addition to W-2 forms under the ACA, where group health insurance premiums are reported. This is also where flexible spending beyond payroll deductions and additional premiums paid by workers and employers are noted. This amount appears with a two-letter code, DD, indicating the cost of an employer-sponsored health plan. This amount is not taxable and doesn’t impact your income related to taxes — it’s for reporting only. The purpose of Box 12, code DD is to provide transparency to workers regarding their health coverage costs.

This box should list the portion of premiums and other costs paid by the employer, and the part paid by the employee.


Net Investment Income Tax

Obamacare placed a 3.8 percent tax on net investment income. Individuals and heads of household with an adjusted gross income (AGI) of $200,000 or greater, married people filing separately who earn $125,000 or more after deductions, and couples filing jointly with an AGI of $250,000 or greater are required to pay this tax.


Medical Cost Deductions

For taxpayers under age 65, the threshold for deducting medical expenses has increased to 10 percent of AGI under the ACA. This applies to unreimbursed costs, or those paid completely out-of-pocket, not covered by your health plan. The threshold is still 7.5 percent for individuals age 65 or older until 2016.


Additional Medicare Tax

Those who will be paying a tax on net investment income will also see an additional 0.9 percent Medicare tax on wages and compensation over $200,000 for individuals. This tax is automatically withheld from W-2 employees, with the total amount deducted in Box 6 of Form W-2.


Filing Status

Threshold Amount

Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000