Many clients have asked us about the tax impact of the health care reform law now that the U.S. Supreme Court has indicated that the law is largely constitutional. The following paragraphs provide a broad outline of some of the key individual tax provisions in that law.
It is very hard to obtain an itemized deduction for out-of-pocket medical care costs. Under current law, a taxpayer must exceed a 7.5% of AGI (adjusted gross income) threshold to obtain a deduction. Under the health care reform, a 10% of AGI threshold will apply.
This rule will generally come into effect in 2013. However, individuals age 65 and older will be able to use the existing 7.5% through 2016.
Health FSA Cafeteria Plan Contributions
The new law limits health flexible spending account contributions to $2,500 in 2013. This significantly restricts these benefits for individuals.
Remember, the pre-tax nature of a health FSA contribution is a major benefit to individuals. Many individuals work for companies that sponsor “cafeteria plans” (pre-tax plans) that contain such pre-tax health FSA type benefits.
The Personal Responsibility Tax Penalty
The U.S. Supreme Court found that the personal responsibility “penalty” is a tax and thus constitutional. This tax provision is found in Section 5000A of the tax code. It starts in 2014 and “ramps up” (increases) quickly. In 2016, the penalty is equal to the greater of $695 or 2.5% of household income (a family cap of $2,085 applies). This provision applies to all clients irrespective of income level.
The personal responsibility penalty tax is aimed at individuals who fail to maintain health insurance coverage. To avoid the penalty, the individual must maintain minimum essential coverage.
Other Individual Tax Provisions In The Affordable Care Act
- Individuals who take a non-qualified distribution from a health savings account (HSA) (or Archer MSA) will incur a 20% (up from a 10%) additional tax (effective 2011).
- In 2018, the new law imposes a 40% excise tax on “Cadillac" health care policies (health coverage). It is an “indirect tax.” The excise tax is imposed on the insurers on a pro rata basis. Thus, either policies will be modified to avoid the tax or there will be higher costs for these types of policies. Stay tuned.
- There will be a 3.8% tax on net investment income over certain threshold AGI amounts. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000. Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won’t apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax.
- A new .9% Medicare tax will apply to earned income effective January 1, 2013. Under the provisions of the new law, which take effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Self-employed persons will pay 3.8% on earnings over the threshold.
- There are other provisions that may directly or indirectly impact a particular individual client. For example, there is an excise tax on manufacturers and importers of certain medical devices. This cost may be passed on to the individual consumer.
Please contact our CPA firm if you have any questions regarding the tax impact of the Affordable Care Act.