Obamacare: Individual Mandate & Net Investment Income Tax

All taxpayers need to take charge of Obamacare tax matters in connection with the health insurance mandate for individuals. Investors, traders and investment managers need know how the 3.8% Net Investment Income Tax affects them. If you have upper income AGI and unearned income from investments, get ready to pay it.

President Trump and leaders of the Republican-controlled Congress promised to repeal Obamacare taxes in 2017, using a Senate majority vote (reconciliation), if needed. I expect Obamacare taxes shall still apply for 2016.

Individual health insurance mandate

The 2012 Patient Protection and Affordable Care Act (also known as Obamacare) has taken several years to implement and phase in. The individual health insurance mandate took effect in 2014 and many taxpayers continue to face confusion over tax penalties, exemptions, premium tax credits, claw backs of subsidies (advanced credits).

If you received subsidies through an exchange in 2016, you must file a 2016 Form 8962 to calculate a premium tax credit or a tax liability. If you did not have ACA-compliant health insurance coverage for 2016 (that includes large gaps in coverage) and you don’t qualify for an exemption, then you will owe a shared-responsibility payment (tax penalty). We help clarify the details in our Oct. 31, 2014 blog postObamacare Ushers in Several New Tax Forms for 2014 and Nov. 12, 2014 Webinar.

For 2016 taxes, the shared responsibility payment for non-compliance increased to either $695 per adult and $347.50 per child (up to $2,085 for a family), or it’s 2.5% of your household income above the tax return filing threshold for your filing status – whichever is greater.

There are Form 1095 Obamacare information filings including: Forms 1095-A (Health Insurance Marketplace Statement), Form 1095-B (Health Coverage), and Form 1095-C (Employer-Provided Health Insurance Offer and Coverage).

Net Investment Income Tax

The Patient Protection and Affordable Care Act has many new and different types of taxes to finance the law, starting on different dates. One of these tax regimes — the “Net Investment Income Tax” (NIT) originally referred to as the “Obamacare 3.8% Medicare surtax on unearned income” — affects upper-income taxpayers as of Jan. 1, 2013. It only applies to individuals with net investment income (NII) and modified adjusted gross income (AGI) exceeding $200,000 (single), $250,000 (married filing jointly) or $125,000 (married filing separately). These thresholds are not indexed for inflation. (Modified AGI means U.S. residents abroad must add back any foreign earned income exclusion reported on Form 2555.) The tax also applies to irrevocable trusts (and estates) on the undistributed NII in excess of the dollar amount at which the highest tax bracket for trusts begins (this amount is $12,400 in 2016).

Net investment income

Notice the terms “investment income” and “unearned income.” People who receive “earned income” from a job pay FICA (on the social security base amount) and Medicare on their entire wages or self-employment income. In general, unearned income includes interest, dividends, rents, royalties, capital gains, income and loss from companies in which you are passive and income and loss from pass-through investment and trading companies. Now, this type of income is subject to Medicare taxes, too — albeit at upper-income brackets only. (See full details on NII in our below guide.)

For more in-depth information on these Obamacare taxes, read Green’s 2017 Trader Tax Guide.

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