Do I Still Have to Pay Taxes After I’m 65?

Cape Horner

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I need to make this very clear—there is no law that says persons over the age of 65 do not have to pay taxes.


But obviously there’s some false information out there because I keep hearing people say they don’t pay taxes because they’re over 65.  What’s worse is that I’m doing back tax returns for senior citizens who are in trouble because they believed that garbage.


Granted, things do change when you retire, but if you’re earning income, Uncle Sam wants you to pay taxes on it.


Now some people don’t make enough money to be required to file a tax return.  Many of those people are senior citizens.  I think that’s where the rumor about not having to pay started—some people don’t have to file because their income is so low they don‘t owe anything.  But if you’re newly retired, you still need to prepare your tax return to make sure.


Here are some things that seniors get into trouble for:


Social Security income:  most people think that social security isn’t taxable.  For many people it’s not, but if you have other income, that could kick you into a category where your social security is taxable.  If you’re preparing your own tax return, you need to include the social security income on your tax return.  The computer program will calculate if any part of it is taxed—but if you leave it off, the program can’t help you.


Pension income:  once again, many people think that their pensions aren’t taxable.  Many pensions have a portion that isn’t taxable, but a completely nontaxable pension is extremely rare.  Your pension must be reported.


Odd job—self employment income:  Often seniors retire from their main job, and they’ll take on a small part-time job someplace just to get out of the house or to help out a friend who owns a business.  They’ll receive a form 1099MISC for the pay.  Under normal circumstances, the income would be small enough that they wouldn’t have to file, but if you have over $400 of self employment income—you’re required to file a return and pay self employment tax.


Stock transactions:  Seniors tend to draw from their investments when they retire.  As you draw funds from your mutual fund—you’re selling the shares.  Let’s say you draw $10,000 out of your mutual fund—the IRS will receive information that says you made $10,000 from selling those stocks.  As far as the IRS is concerned—you need to be taxed on that $10,000, plus that will probably kick you into having your social security be taxed as well.  But the truth is, you didn’t make $10,000 on that stock transaction—you may have even lost money—that’s why it’s so important to file your return so the IRS knows you don’t owe as much as they think you do.


The biggest problem with not-filing your tax return is that it takes the IRS a few years to catch the problem.  So by the time you get your IRS letter, they’ve already attached a “failure to file” penalty of 25%, and “failure to pay” penalty of up to 25%, and they’ve added interest on top of that.


So make sure you file your tax returns after you retire.  I recommend filing every year, even if you don’t owe and even if you’re not required to file.  It protects you from the failure to file penalty in the event the IRS “finds” something later.


Bottom line—you’re never too old to pay taxes.

Can I Write Off My Child Support Payments on my Taxes?

Divorce and Children

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Quick answer:  No.


For a longer answer, you may want to know why.  Here’s the reasoning:  if you are married and living with your family and raising your children—there’s no deduction for paying for their school clothes or feeding them.  That’s pretty much what your child support payments are—feeding the kids and paying for clothes.  So whether you live with your kids, or live apart, the money that’s used for those day to day necessities is not a tax deductible expense.    You don’t get a deduction for paying it and your ex doesn’t claim it as taxable income.


What about alimony?  Alimony is different—you get to deduct alimony on your tax return if you pay it, and your ex has to claim the alimony as income.  Alimony counts as income so your ex will have to pay taxes on it. Alimony does not count as earned income for the earned income tax credit, but as one of my clients explained to me, “Oh, honey—trust me I EARNED it!”


You might be thinking that paying alimony is better than paying child support—but there’s a catch to that thinking.  If the “alimony” ends when the kids turn 18— the IRS will call it child support anyway so you lose all the tax advantages.  Alimony basically goes for the life of your ex or until a re-marriage occurs.   So while alimony has some tax advantages—child support at least has an end date.  (There are some cases where alimony is only paid for a limited time, but it has to be very separate and distinct from any type of child support to be valid for tax purposes.)


Some people pay both alimony and child support.  In a case like that you can deduct the alimony portion of your payment on your tax return.  Now it’s important to know—if you fall behind on your payments—the IRS assumes that you pay the child support first.  For example:  Let say you pay $300 a month in child support and $200 a month in alimony.  For the year you pay $6000 all together:  $3,600 in child support and $2,400 in alimony.  You’ll take a $2,400 deduction for the alimony on your tax return.


Now, what happens if you lost your job and didn’t make any payments in November and December of the tax year?  You would have paid $5,000 total, right?  ($500 times 10 months)  And $2,000 of that was for alimony.  But according to the IRS—you pay the child support first.  So of the $5,000 that you did pay, $3,600 went towards the child support and you only get to deduct $1,400 (the amount that’s left) for the alimony.  So make sure that you’re all paid up before the end of the year if you want to deduct all of the alimony on your tax return.


If your hungry for more, try to put icing on the cake.

Can I Write Off My New iPad as a Business Expense? (A lesson in listed property)

New iPad

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Recently someone asked me if he could write off his iPad as a business expense.  Now for that guy—the answer was a resounding, “Yes!”  But I knew all of the circumstances and I knew he had an audit proof reason for the iPad.  For most people though—deducting the iPad purchase is a resounding, “Maybe.”


Here’s why—


First, you need to consider if the purchase of your iPad would be an “ordinary and necessary” expense for your business?  Now in the case of my iPad guy, he’s a computer programmer and he had been hired to develop some apps specifically for the iPad.  Although he felt confident that he could develop the apps without an iPad, he thought it might be useful to own one.  (Okay, duh!  I think he just wanted me to okay his iPad purchase to his wife.)


But you don’t need to be a programmer to justify the expense; there are plenty of really good uses of an iPad for your business.  I could just set up a video camera and let my husband do a 20 minute infomercial about why every business person in America needs an iPad.  He actually bought his for fun and found that it’s great for his business; he uses it all the time.   I think many businesses would pass the “ordinary and necessary” requirements for the write off of a tool like that.


Second, you need to consider how much you’d use it for business.  This is really important because the iPad counts as “listed property.”  Listed property is the fun stuff.  Cameras, computers, and stereo equipment—basically the fun stuff that you can get at Best Buy.  Cars are also considered to be listed property.


So here’s the deal—if you buy business equipment that is not listed property—like a file cabinet, and then you quit using it—the IRS doesn’t really care too much about that.  But if you buy some fancy video equipment “for business” and then don’t use if for business—well the IRS has some ideas about that and those ideas will all cost you some money!  Basically, anytime your business use of listed property falls below 50%—then you’re going to have to “recapture” (that means pay tax) on the deduction that you took earlier on your next tax return.  Yuck!


Let’s take that iPad for example.  A new iPad costs $500.  You buy it this year and you take the Section 179 deduction for it and write off the whole $500 as a business expense for your sole proprietorship.  (A Section 179 deduction is what you call it when you buy a piece of equipment and expense the whole thing instead of depreciating it.  Depreciation is where you buy something expensive and write off the expense over a couple of years—it depends upon the equipment to determine how long the write off is for.)


That’s all fine and dandy if you use the iPad 100% for business and you keep using it for business.  But let’s say you buy it, write it off, and then next year you give it to your daughter for school.  Now it’s not a business tool anymore.  If you do that—the IRS will make you “recapture” the unused depreciation.   So next year, you’d have $400 of extra income to pay tax on.  (Because they’d let you keep the $100 expense deduction for the year you used the iPad for business.)


Now I realize that I’m oversimplifying things—but that’s the basic gist of it.  It’s okay to buy cool stuff for your business.  It’s okay to write it off.  But if you’re not going to be using it for the full term of its use (most things are 5 years) then you might want to think twice before writing off the whole thing.

Multi-State Tax Returns: Living in Illinois/Working in the City of Saint Louis

St. Louis Arch

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I’ve written before about working on multi-state tax returns, see:


But this is specifically about Illinois and Missouri.  Even more specific than that—living in the state of Illinois and working in the City of St. Louis, Missouri.


Who would have thought this would be a big deal?  But for some people it might be.  You see, if you live in Illinois and work in Missouri, you get a credit for the income tax you pay to the state of Missouri to offset your Illinois income tax.  It used to be that the Illinois state income tax was only 3% while Missouri’s income tax was 6%.  The Missouri state tax pretty much covered all of most people’s Illinois income tax so you usually didn’t have a balance due on your Illinois tax return.


But now, the Illinois state income tax is 5%—and though 5% is less than 6%, Missouri allows more deductions than Illinois does so now the Missouri tax is often lower than Illinois tax.  And that’s where the City of St. Louis income tax comes in.  Most people call it the City of St. Louis earnings tax.


You see—Illinois allows you to use the City of St. Louis, Missouri income tax as a credit against your Illinois state income tax—and for some people, that really helps their Illinois tax bill.


Here’s the tricky part—even though you’re allowed to do it—it’s not automatic when you prepare your tax return.  You’re going to have to go in and manually claim it.  For example:  in my tax software, the program will automatically compute the credit for the Missouri state income tax, but it leaves the City of St. Louis out.  Same with Turbo Tax.  If I want to claim the credit for the St. Louis City tax, I have to go to the Credit to taxes paid to another state form and override the credit.  (I take the Missouri tax credit and I add the City taxes paid and put that number in the override box.)


If you’re working in Turbo Tax, when you’re on the credit for taxes paid to another state input page—you have lines for the different states.   Your Missouri tax credit should already be there, and then you just add the St. Louis City Tax on the next line.  It’s not difficult to do; you just have to know to do it.


Here’s a warning:  I spoke with a representative at the Illinois Department of Revenue and he told me that while it’s perfectly legal to claim a credit for taxes paid to the City of St. Louis, that you shouldn’t be surprised if you receive a letter from the Illinois Department of Revenue questioning that claim.  Don’t be frightened by this.  What happens is that the computers check against your state income tax and when the numbers don’t match it kicks out a letter to the tax payer.  If this happens to you, you just respond that you claimed the St Louis City tax as well.  You probably will need to include a copy of your W2 showing the city tax paid.   He said that it happens a lot with people who work in Paducah, Kentucky which also has a city tax.


Now if your Missouri income tax credit already covers all of your Illinois tax, you don’t even need to bother with the St Louis city tax—your tax credit is only good up to the amount of tax liability you have to Illinois.


But if you’ve done your Illinois return and you’ve got a balance due—that City of St Louis tax can come in mighty handy.

Does the New Health Care Bill Have a 3.8% Sales Tax on Selling Your Home?


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I received a question from Laura who asked:


“I just received an email from a friend that said that there will be a 3.8% tax on all home sales after 2012 and that this tax is part of the Health Care bill. Do you know anything about this and can you clarify it?  Thanks.”


I’ve heard that one too, but it’s not exactly true.  Last week I wrote about a 3.8% Medicare tax on investment income which includes long term capital gain transactions of real estate—and that’s the rule that people are referring to when they talk about a sales tax on selling your home.


Let’s sort this out so you know exactly what’s going on.


Bottom line: if you sell your house after you’ve lived in it for at least two years, $250,000 of the profit is excluded from capital gains tax. ($500,000 if you’re married.) Let’s say your house cost $200,000 (this is usually referred to as “basis” in the tax prep world) when you bought it and you sell it for $400,000, that’s a gain of $200,000.  You’re not even in the running for paying the 3.8% Medicare tax because all of that gain was excluded from your income.  For you, this Medicare tax would not be an issue at all.  None of the proceeds from the sale of your home in this instance would even show up on your tax return.


Now let’s say you live someplace where the property values have gone up astronomically.  (Clearly you don’t live in my neighborhood if they did.  Our values just seem to drop while our property taxes go up.  Sorry, I’m whining.)  Okay, let’s say you live someplace where real estate values have increased way more than they have here in Missouri—then you could have an issue.


Let’s say you bought your house for $100,000 and sold it for $800,000 so that you’ve got a profit of $700,000. A $700,000 profit is a good thing!  Assuming that you’re married, you get to exclude $500,000 of that gain from the capital gains tax so you would only pay tax on the extra $200,000.


Let’s do the math:  $800,000 sales price – $100,000 purchase price = $700,000 capital gain.


$700,000 capital gain – $500,000 capital gain exclusion = $200,000 that you have to pay capital gains tax on.


A transaction like that will kick you into a high enough tax bracket to pay that extra Medicare tax in addition to the capital gains.


For most normal folks—we’ll never have to pay the Medicare tax on the sale of our homes.


If the value of your home has increased so much that you have to pay that tax—then to quote Charlie Sheen, “Winning!”   Seriously, you’d have gained $700,000 on the sale of your home.  That would be awesome.  And you’d only have to pay capital gains tax on $200,000 of it.


Right now—the capital gains tax for 2013 is scheduled to be 20% (who knows what Congress will say before the year is out but that’s what it’s scheduled to be.)  And the extra Medicare tax will be 3.8%.    So—let’s do the math on that:


200,000 taxable gain x .2 capital gains tax = $40,000


200,000 taxable gain x .038 Medicare tax = $7,600


So the total tax on that gain would be $47,600.  As bad as that sounds, remember we’re looking at a $700,000 gain to begin with so you’re really only paying 6.8% (or 47,600/700,000 * 100) tax on that amount.  Granted, we’re talking about one little example with crazy numbers—but remember—that’s for someone who has enough gain to have to pay in the first place.  Like I said earlier, for most of us—we’re looking at zero tax money spent on the sale of our homes.


(Note from editor:  So I checked the web and saw that many people were receiving emails claiming that there was this 3.8% sales tax on the sale of your home.  However, what these emails failed to explain was the exclusion amounts (250k single or 500k married) that are shielded from tax.  They later went on to criticize the health care bill and our current president.  Since it is an election year, you are probably more susceptible to emails or messages like this to try to get you to vote a certain way.  Do your research and keep checking in with this blog for the most recent and accurate information.)

Claiming Meals as a Business Expense

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I was working on a client’s tax return and he had a whole lot receipts for business meals.  A whole lot.  I do a lot of tax returns and I’m pretty familiar with claiming meal expenses.  This guy wasn’t in one of the jobs that I normally associate with lots of meal expenses – so I had to ask him about it.


He told me, “Well yeah, I own my own company and my wife helps me and so we go out to dinner together all the time and we talk about work so I write it off as a business expense.”


Here’s the problem – that’s not going to fly with the IRS.  If you are just going out to dinner with your spouse, even if you do nothing but talk about business – well then, it’s not a deductible business expense.


I deal with this issue all the time.  Heck, my own husband will say, “Hey we talked about business, you can deduct our dinner!”  And yes, my husband often gives me excellent business advice during dinner (he’ll read this blog post so I have to say that) but I still can’t deduct having dinner with him for business purposes.  (As smart as he is at business, he stinks at taxes.)


Here’s the IRS rule:  “Generally you cannot deduct the cost of entertainment for your spouse or for the spouse of a customer.  However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose for providing the entertainment.”


So, I can bring my husband, Mark, along if I’m entertaining a client who needed to bring her husband along as well.  For example, someone is in from out of town and wouldn‘t want to leave her husband all alone in the hotel.  But if I’m just having dinner with my husband alone – no deduction.


There are lots of other rules about claiming meals as well.  You’re supposed to record the expense “contemporaneously”.  That’s a fancy way of saying you should write down on the receipt who and why.  For example, Helene is one of my advertising people.  We both like the grand slam breakfast so I’ll meet her at Denny’s.  On the receipt I would write, “Helene, advertising.”  Quite frankly, Helene is the only person I meet at Denny’s so if I’ve got a Denny’s receipt, I know who I was meeting and what we were talking about.  But a Bread Company receipt?  Well I probably meet someone there once a week.  If I don’t write that down that might not survive an audit.  It’s just a good business practice to write who and what on the receipt every time.


Here’s a silly little tip that makes the IRS happy:  when you’re paying for a business meal with your credit card, write the name and reason for the meeting on the slip that you sign and give to your waitress.   That way, your “contemporaneous reporting requirement” is proved on your receipt carbon.  Your waitress might think you’re a little weird but chances are she won’t even notice.


If you want more information about entertainment meal expenses, you can check out the IRS publication 463:


And now, I’m headed off to a non-deductible dinner with my husband!

Obamacare – What You Need to Know (Part 3)

Carlos Beltran - St. Louis - 2012 Road

Photo by BaseballBacks on; St. Louis Cardinals outfielder, Carlos Beltran, put on a strong showing in yesterday's homerun derby! Go Cardinals!

Part 3: Medicare Tax on Investment Income to Start in 2013

If your income is less than $125,000 a year, then you don’t need to worry about this. But if you are a high income earner, then you should really make sure you check this out.


First, there are two things you need to be aware of about taxes on investment income for 2013. One is that the current maximum tax rate on long-term capital gains is scheduled to go up to 20% instead of 15% which it now is (unless Congress decides to act). This is due to the sun setting of the Bush Tax Cuts. It has nothing to do with Obamacare – that’s already in the tax code.


The second issue is that higher income folks will also be taxed with an additional 3.8% Medicare contribution tax. (This is what’s in the Obamacare tax package.) This Medicare contribution tax will only apply to higher income earners so those people will also be in the 20% long term capital gain tax as well.


What makes the 3.8% Medicare tax kick in? It’s all going to be based upon your adjusted gross income (AGI), kind of like the higher Medicare tax on wages that I wrote about last time. The Medicare tax will kick in if your AGI exceeds:


$200,000 if you’re single or filing as head of household
$250,000 if you’re married and filing jointly, or
$125,000 if you use the married filing separate status


Before I go on, what exactly do they mean by net investment income? When I was reading the rules, I was thinking about stocks and bonds – that’s what I consider to be investment income. But for this tax, investment income also includes interest, dividends, royalties, annuities, rents, income from passive business activities, income from trading in financial instruments or commodities, and of course, gains from assets held for investment like stocks and other securities. As you can see, this category is much larger than just stocks and bonds. One thing that’s not included here are gains from assets held for business purposes – those won’t be subject to the extra tax.


So how does the tax get applied? Now this is where it gets a little funky – the 3.8% tax is going to apply to the lesser of your net investment income or the amount of your AGI in excess of your net investment income. Whew – did you feel something fly right over your head? Trust me I had to read that over a few times to figure out what that meant. And trying to word it differently didn’t always give the right meaning – so let me explain with some examples, okay?


Let’s say you’re a married couple and your joint income is $275,000. $225,000 in wages and $50,000 in investment income. You’re going to pay the 3.8% Medicare tax on the investment income that is over the $250,000 threshold. Here’s the math:


275,000 – 250,000 = 25,000 (Long version: $275,000 income – $250,000 threshold = $25,000 amount of investment income subject to the extra tax)


25,000 x .038 = $950 (Long version: $25,000 investment income subject to Medicare tax x 3.8% Medicare tax rate = $950)


So even though you had $50,000 of investment income, you only pay $950, or 3.8% of the 25,000 over the $250,000 threshold.


Now let’s say you’re single with those same numbers. Because your threshold is lower, you’d wind up paying the 3.8% tax on all of your investment income. Here, let me show you the math again:


275,000 – 200,000 = $75,000 (Long version: $275,000 income – $200,000 threshold = $75,000 amount of investment income that could be subject to the extra tax)


But $75,000 is more than the $50,000 investment so we only use the $50,000 to compute the tax.


50,000 x .038 = $1,900 (Long version: $50,000 investment income subject to Medicare tax x 3.8% Medicare tax rate = $1,900)


Got it?


Now remember, I’m just computing the new Medicare tax here – I haven’t taken into account the increase in the long term capital gains rate that is also scheduled to go into effect. And I haven’t even discussed the fact that the tax rate for qualified dividends (which are currently taxed at the long term capital gains rate) is scheduled to change to the ordinary income tax rates. Those changes, if they are not addressed by Congress before the year ends, will have an even larger impact on investment income tax than the Medicare tax and will be affecting persons of all income levels.


Remember, these tax changes are scheduled for 2013 so they are not in effect for 2012. You just need to be aware of what’s coming so that you can make intelligent decisions about your investments.

Obamacare – What You Need to Know (Part 2)

Part 2: New Medicare Taxes to Start in 2013


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In my last post I wrote about the penalty you could pay if you don’t have health insurance.  Those taxes start in 2014.  Today, I’m going to talk about the new Medicare taxes that are supposed to start next year in 2013.


First thing to know – if your income falls below $125,000 a year – you don’t even need to read the rest of this, it’s not going to affect you.  (You’re welcome to stay, I like when you stay, and I just don’t want to waste your time.)


But the additional Medicare tax is really targeted at higher income earners.  Starting in 2013, an additional .9% hospital insurance (I’m going to call that HI for short) will be imposed on wages in the following categories:


over $250,000 for married taxpayers filing a joint return (MFJ),

over $125,000 for married taxpayers filing separately (MFS), and

over $200,000 for singles and head of households (Single and HOH)

* Employers will begin withholding the HI tax on any wages that are in excess of $200,000.  Wages earned by your spouse are not taken into account in the withholding calculations.


So let’s say you’re married and your joint income is $300,000.  Your additional HI tax would be computed as follows:

300,000 – 250,000 = $ 50,000 (that’s the excess over the threshold)

50,000 x .009 = $ 450


If you are an employee at a company, your boss would be withholding the excess from your wages.


If you are an employer and you have employees that earn over the threshold, you do not have to pay the employer match like you do with the regular Medicare tax – this HI (hospital insurance) tax is for employees only.  You’re still paying it with your payroll tax return because you withheld the funds, but you’re not matching the funds with your own money.


If you are self employed you have to pay the HI tax on your earnings.


What that could mean to you – Let’s say you’re married and you and your wife each earn $190,000 a year.  Your combined income is $380,000 a year so you’d have to pay a HI tax of $1,170 ((380,000 income – 250,000 MFJ threshold from table above) * 0.009).  Because neither of your individual incomes put you over the threshold, you won’t have withheld enough and you’ll have to pay the additional tax.


Likewise, let’s say you’re married with a non-working spouse.  You make $250,000 a year.  Your employer has withheld an extra $450 from your pay because you made over $200,000 – but since you’re married, your filing threshold is $250,000 so you should be getting that excess $450 back.  (To get to this $450 withholding, we take ($250,000 income – 200,000 employer holding threshold) * 0.009.)


So that’s the new Hospital Insurance tax on higher wages and self employment income.


There’s also a new HI tax on investment income.  Once again, that will also be on folks with higher incomes.  I’ll be tackling that in my next post.


Note from Editor:  Since I am a numbers guy, I added a chart to demonstrate the amount of HI Tax you could incur.   Because the 0.9% is a flat rate (meaning it never changes), for each increase of $1,000 in income, the HI tax will increase by $9.  Here I am going to show increments of $5,000 which will result in $45 increases.


Hospital Insurance Tax for High Income Earners
HI Tax Rate Excess Over Threshold Amount (The amount being taxed) Total (HI) Tax
0.009 x $ 5,000 = $45
0.009 x 10,000 = 90
0.009 x 15,000 = 135
0.009 x 20,000 = 180
0.009 x 25,000 = 225
0.009 x 30,000 = 270
0.009 x 35,000 = 315
0.009 x 40,000 = 360
0.009 x 45,000 = 405
0.009 x 50,000 = 450
0.009 x 55,000 = 495
0.009 x 60,000 = 540
0.009 x 65,000 = 585
0.009 x 70,000 = 630
0.009 x 75,000 = 675
0.009 x 80,000 = 720
0.009 x 85,000 = 765
0.009 x 90,000 = 810
0.009 x 95,000 = 855
0.009 x 100,000 = 900


Obamacare – What You Need to Know (Part 1)

Editor: Thank you Wendy and Jeff for inspiring such a great post! Jan and myself are deeply vested in the decisions made by our White House. We hope to bring clarification to everyone in the like on this confusing but pertinent ruling. Happy Fourth of July!

Part 1:  How Much is the Penalty for Not Having Health Insurance?


In less than an hour after the Supreme Court announced their ruling that Obamacare was Constitutional, my phone started ringing with people asking me questions. I’ll be honest – I wasn’t prepared for that.  But the one caller that really got to me said, “Make it simple so that I can understand it.”  Her big question was – How much is it going to cost me?  So for her – I’m going to try my best to explain it.


Today I’m going to talk about the mandate part – that is – how much tax you’re going to have to pay if you don’t have health insurance.  (And yes, it is a tax because the Supreme Court says so.  This is a point people argue about but today I’m skipping to the math.)


First thing to know:  You aren’t required to have health insurance until 2014, so if you’re reading this in 2012 you’ve got time to figure things out.  The actual tax won’t have to be paid until the next tax season which would be in April of 2015.  That should give you a time line to work with.


The second issue is – who’s going to have to pay?  If you read the law it says non-exempt US citizens and legal residents.  This is another part where everybody goes all nutso about illegal aliens not having to pay the health insurance tax.  While that’s a genuinely valid concern, I’m not going to touch that today.  I’m looking at those of us who are citizens and legal residents – what are we doing? Fair enough for now?


Okay – so what does that “non-exempt” part mean?  Here, anybody whose income is below the filing threshold is exempt from having to pay the tax for not having health insurance.   Those “non-exempt” people are the ones who have to pay.  Filing threshold is the amount of money you make where you have to file your income taxes.  Say you’re single, for 2012 the IRS says the filing threshold is $9,750 so if you make less than that you don’t have to have insurance.  If you’re married, the filing threshold is $19,500 for 2012.  The filing threshold usually goes up a little bit every year so it will be different for 2014, but probably not by much.


So those incomes are pretty low, so what happens to the single person who makes $25,000 a year?


This is where it gets kind of tricky.  They compute it as a formula.  For 2014 the penalty for not having health insurance will be $95 or 1% of your income over the filing threshold – whichever is greater.


So let’s look at the single guy who makes $25,000 a year.  Take his income of $25,000 and subtract the filing threshold (I’m going to use 2012 numbers because I have those) 25,000 – 9,750 = $15,250.  Then you multiply that by one percent or .01.  That gives you $152.50.  Since the $152 is a bigger number than the $95, that’s what he’d pay.


Are you still with me?  Now if the married family made the same amount, they’d pay less because they have a different filing threshold.  The formula would look like this:


25,000 – 19,500 = $ 5,500   (income minus threshold = excess household income)


5500 x .01 = $ 55 (excess household income times percentage = tax)


Oopsies – except here the number is less than $95, so the family would have to pay the $95 minimum anyway.  The $95 is a de minimis amount for those of you who may be involved in law or mathematics.


So that’s how you compute it for 2014. But in 2015, the numbers go up. In 2015, the minimum is now $325 and the percentage of excess household income goes up to 2%.


(Okay, excuse the opinion here but who in the heck called it excess household income?  If you’re married and only making $25,000 a year, you ain’t got any excess household income.  Just sayin’.  I understand the tax, I understand what they’re doing, but excess household income was a stupid choice of words!  Okay I’m done.)


Let’s stick with our single guy making $25,000 a year.  (It would be nice if he got a raise in real life, but it keeps the math easier for this if he doesn’t.)  I’m not changing the thresholds either, only the healthcare tax.


Now the formula looks like this:

25,000 – 9,750 = $ 15,250

15,250 x .02 = $305 But now the minimum health insurance payment is $325 so the bite is a little harsher.


For 2016 – the minimum penalty will be $695 or 2.5% of your income. Using the same numbers from before:

15,250 x .025 = $ 381


So by 2016, our single guy will be paying a $695 tax for not having health insurance.


Now just to put a different perspective on it, let’s say our young man here gets a nice promotion and is making $100,000 by 2016, what happens to him then?


100,000 – 9,750 = $90,250 excess household income

90,250 x .025 = $2,256 that’s the tax he’ll pay for not having health insurance.


So if you want to get a good estimate of what your tax bill will be for not having health insurance, you’ll need to follow three steps:


1.  Figure your excess household income

your income   –   your filing threshold = excess household income


2.  Take your excess household income and multiply it by the percentage in the table for whatever year you’re looking at.


3.  Compare the number you came up with to the minimum amount listed in the table.  You’re going to pay the higher amount.


Here’s the table:


Year        minimum penalty         percentage excess household income

2014           $ 95                              1.0%

2015           $325                             2.0%

2016           $695                             2.5%

After 2016 it will be indexed for inflation.

Filing thresholds for 2012 (that’s the latest I’ve got)

Single:                                $9,500

Head of Household:        $12,450

Married Filing Jointly:    $19,500


(Note:  the filing thresholds are higher for people over 65 – but if you’re over 65 you should qualify for Medicare and this won’t be an issue for you.  Also, these amounts go up by $3,800 (the dependent exemption amount) per 1st and 2nd child.


On Friday I’ll address some of the other taxes associated with the Health Care Act.  I think I’ve already thrown enough math at you for one day now. Besides, this stuff makes me dizzy!