The Affordable Care Act Contains Several New Taxes That Could Affect You
posted Jul 23, 2012 by Norman LeBlanc, CPA
After the Supreme Court ruled to uphold the Patient Protection and Affordable Care Act of 2010 (“ACA”) as constitutional, the focus now turns to what that means for everyone. This article summarizes the effects of ACA’s tax provisions on individuals and businesses in the near future. The ACA tax changes, coupled with the expiration of the Bush-era tax rates at the end of 2012, increase rates for upper-income individuals in 2013 and beyond. Here is a summary of the ACA’s tax changes that will be implemented, now that the Supreme Court ruled the ACA is constitutional.
For Individuals: Starting in 2013
For 2013, the ACA introduces two (2) different Medicare taxes that increase taxes for higher-income individuals.
- New 0.9% Medicare Surtax - First, for joint filers with wages above $250,000 and single filers whose wages exceed $200,000 there will be an additional Medicare tax of 0.9% on the excess wages exceeding $250,000 joint/$200,000 single filer thresholds. The levy also applies to individuals with self-employment income above the thresholds.
- New 3.8% Medicare Surtax- Second, and for the first time ever, a Medicare surtax of 3.8% will apply to investment income. This 3.8% tax will apply to either (i) unearned income, or (ii) the amount by which adjusted gross income exceeds the $250,000 (joint filer)/$200,000 (single filer) thresholds, whichever is less. What is unearned income? The ACA defines it as interest, dividends, capital gains, annuities, royalties and passive income from rents and businesses where you don’t actively participate. Unearned income does not include tax-exempt interest, withdrawals from retirement plans, life-insurance proceeds payable at death, veterans’ benefits and income from businesses where you do actively participate, such as S corporations or partnerships. The 3.8% tax doesn’t affect someone without investment income. If your entire income is from investments, it doesn’t apply either, as long as your total investment income is under the $250,000/$200,000 thresholds.
- Flexible Spending Account Contributions Capped at $2,500 - Beginning in 2013, the ACA limits the amount you can set aside pre-tax to pay for medical expenses to $2,500. So for those who have been setting aside more than $2,500 for medical expenses, you must reduce that to $2,500. This results in more of your income being subject to income taxes.
- Raised Threshold to Deduct Unreimbursed Medical Expenses- In 2013 the threshold to deduct unreimbursed medical expenses will raise from 7.5% to 10% of adjusted gross income. So if your adjusted gross income is $100,000, you will only be able to deduct medical expenses over $10,000, where before you could deduct expenses over $7,500.
For Businesses: Starting in 2013
- Tax Credits for Small Businesses - The ACA also has a small businesses tax credit, which is effective immediately. This credit is targeted to help small businesses that employ 25 people or less with average incomes of $50,000 or less. For tax years 2010 to 2013, the maximum credit is 35%, as long as the employer contributes at least 50% of the total health insurance premium or 50% of a benchmark premium. Starting in 2014, a maximum credit of 50% is available for two years to employers who buy health insurance coverage through a state exchange and contribute at least 50% of the total premium .
- Medicare Part D Deduction- Starting in 2013, the ACA eliminates, in coordination with Medicare Part D, the tax deduction for employer-provided prescription drug coverage.
- Medical Device Excise Tax - Beginning in 2013, the ACA imposes a 2.5% tax on the sale of certain medical devices, payable by the device’s manufacturer, producer or importer.
For Individuals: Starting in 2014 and Beyond
- Individual Mandate- Effective in 2014, most U.S. citizens and legal residents failing to maintain minimum health coverage on themselves and their dependents will face a tax penalty. The basic penalty for an individual is $95 in 2014, $325 in 2015, and $695 in 2016 and later years, with some exceptions for the poor and certain others.
For Businesses: Starting in 2014 and Beyond
- Employer Mandate- The ACA imposes tax penalties on certain employers that don’t provide their employees health coverage starting in 2014. Employers with 50 or more full-time-equivalent workers who do not offer coverage and have at least one full-time employee who receives a premium tax credit are subject to an annual fee of $2,000 per full time employee (not including the first 30 FTEs).
- Tax on “Cadillac” Plans- Starting in 2018, there will be a 40% nonrefundable excise tax on ‘Cadillac’ plans, levied on plans with annual premiums in excess of $10,200 for individual coverage and $27,500 for family coverage (excluding stand-alone dental and vision plans). The thresholds are higher ($11,850 and $30,950, respectively) for retirees and employees in certain high-risk professions.
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