The Affordable Care Act, enacted in 2010, contains some tax provisions that are in effect and more that will be implemented during the next several years. The information under the following headings briefly explains some of the income tax provisions of the legislation.
This credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees, and is specifically targeted for those businesses with low and moderate income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. To qualify for the credit for tax years beginning in 2014 and forward, a small employer must contribute toward premiums on behalf of each employee enrolled in a qualified health plan (QHP) offered by the employer through a Small Business Health Options Program (SHOP Exchange). For additional information on this topic, refer to the Small Business Health Care Tax Credit for Small Employers page.
Tax-free treatment for employer-provided health care to an employee’s child has been extended until the end of the year in which the child turns age 26. The costs and reimbursements under employer health plans for coverage for an employee's eligible children are free of income, FICA and FUTA taxes, regardless of the IRS’s dependency tests. This expanded health care tax benefit applies to various work place and retiree health plans. Employers with cafeteria plans (plans that allow employees to choose from a menu of at least one qualified benefit and a taxable benefit (such as cash)) can permit employees to pay for health coverage for children with pre-tax contributions. This tax benefit also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2 (PDF), Wage and Tax Statement, in Box 12, using Code DD. Reporting the cost of health care coverage on the Form W-2 is for informational purposes only. This reporting requirement is intended to provide employees useful and comparable consumer information on the cost of their health care coverage. The value of the employer’s contribution to health coverage continues to be excludable from the employee's income and is not taxable. Many employers are eligible for transition relief for tax year 2012 and beyond, until future guidance limits the availability of some or all of this transition relief for this reporting requirement. The total of the aggregate reportable costs attributable to all the employer’s employees is not required to be reported on Form W-3 (PDF), Transmittal of Wage and Tax Statements. More information about the reporting can be found in the Form W-2 and W-3 General Instructions.
A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual’s filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately, and $200,000 for all other taxpayers. An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. For more information on the Additional Medicare Tax, see questions and answers.
A new Net Investment Income Tax goes into effect starting in 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds, 250,000 for married taxpayers who file jointly and Qualifying widow(er) with dependent child, $125,000 for married taxpayers who file separately, and $200,000 for all other taxpayers. For additional information on the Net Investment Income Tax, see Net Investment Income Tax FAQs.
Starting in 2014, individuals and families who get their health insurance coverage through the Health Insurance Marketplace may be eligible for the Premium Tax Credit. This tax credit can help make purchasing health insurance coverage more affordable for people with moderate incomes. The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums. The open enrollment period to purchase health insurance coverage for 2014 through the Marketplace runs from October 1, 2013, through March 31, 2014.
For additional information on this topic refer to the Premium Tax Credit page on IRS.gov. The Department of Health and Human Services administers the requirements for the Marketplace and the health plans they offer. For more information about your coverage options, financial assistance and the Marketplace, visit HealthCare.gov.
Additional information about these and other tax provisions included in the Affordable Care Act, see our Affordable Care Act (ACA) Tax Provisions page. Visit the Department of Health and Human Services website, HealthCare.gov, for more information about your coverage options, financial assistance and the Health Insurance Marketplace.
Page Last Reviewed or Updated: July 16, 2014