With the end of 2014 quickly approaching, something to be cautious of for self-employed taxpayers is the implications of the Affordable Care Act (ACA). This is a topic we’ve discussed before, but it deserves a second mention due to its potential impact. The subsidy a self-employed taxpayer receives is based on their net earnings from self-employment. Therefore, if when they applied for health insurance on the health insurance exchange they projected their net earnings to only be $20,000, but it ends up being $40,000 they might owe a substantial amount of additional taxes. This is because the health insurance subsidy provided is a tax credit.
Using a single 30 year-old California resident as an example, if their net income was $20,000 for 2014, their total premium for 2014 would be $3,234 for a silver plan with a $2,213 tax credit. The total amount they would pay for health insurance would be $1,021 for the year. If the same person ended up having a net income of $40,000, they would receive no tax credit. What this means is that the $2,213 tax credit they received initially is tacked on to their 2014 federal income tax bill, which is substantial for the majority of people and needs to be well understood.
For those looking to avoid a huge tax bill for 2014 due to the ACA, especially, after not owing anything or close to nothing in 2013, there are a couple ways to combat that huge tax bill or at least lessen the blow:
1. If you used an insurance agent to sign up on the exchange, tell them your projected income has changed and start paying the correct insurance premium at least the last couple months of the year. This will help lower your tax bill.
2. Consult a tax professional. This way you can make sure you are getting all the deductions you deserve and perhaps have them help with projecting your 2014 income if you are unsure of what it will end up being.
3. Send in a federal estimated tax payment for 2014. This will allow you to avoid paying all the taxes at once in April.
As always, thank you for checking out our company blog, and we hope everyone has a productive week!