Health Reform Passes - Penalties are “Taxes”

In the Supreme Court’s 5-4 decision allowing most of the Affordable Care Act to stand, Justice John Roberts interpreted “fees” levied on individuals who choose not buy something (in this case health insurance) as a tax and not a penalty.  If such a fee is, in fact, a tax (and not a penalty), Justice Roberts reasoned, it falls within the scope of congress’s constitutional authority. 

Although such an interpretation may have profound legal and social implications, those of us in the tax profession are waiting to see if the IRS shares Justice Robert’s sentiment: Will this “penalty/tax” be a deductible business expense or a nondeductible penalty?  Many taxes such as the employer’s share of social security and Medicare are deductible.  Penalties for a violation of law or legal “mandate,” however, are generally not.

Professionals who had taken a wait-and-see posture regarding the Act’s constitutionality are also starting to dig into the details of the Affordable Care Act.  This article will share a few uncovered details that may impact you and/or your business in 2013.  It will also discuss the penalty/tax scheduled to begin in 2014.

2013

• Medical expense itemized deduction threshold will increase from 7.5% of Adjusted Gross Income (AGI) to 10% of AGI.  For those 65 years or older the percent will remain 7.5% until 2017.
• The annual contribution to Flexible Spending Accounts for medical expenses will be limited to $2,500.
• A 2.3% tax on medical devices used by physicians or implanted in patients (from tongue depressors, to bedpans, to replacement knees).  Tax is paid by manufacturers and does not apply to items purchased directly by the general public such as eyeglasses, hearing aids, or devices.
• A 0.9% Medicare surtax on individuals earning wages of over $200,000 per year and couples with combined wages exceeding $250,000 per year. 
• A 3.8% Medicare surtax on those with net investment income over certain amounts.  For individuals, the tax will be imposed on “investment income” that causes their income to exceed $200,000 or $250,000 for those married filing jointly.  Investment income includes interest, rents, annuity income, capital gains, dividends, and royalties.  Although the tax may not impact the sale of most primary residences, it may affect those selling second homes, rental, and investment properties.

2014: The Penalty/Tax Kicks In:

• All United States citizens and legal residents are required to have health insurance or pay the penalty/tax mentioned above.  This requirement is also called the “Individual Mandate” portion of the Affordable Care Act.  Although there are several exceptions for the extremely poor, the “penalty” for those who do not have health insurance coverage is phased in from 2014 through 2016.  In 2014 the penalty is the greater of $95 per adult and $47.50 per child (up to $285 per family) or 1% of household income.  By 2016 the penalty increases to the greater of $695 per adult and $347.50 per child (up to $2,085 per family) or 2.5% of household income.
• Cost-sharing subsidies and refundable premium tax credits will be made available to individuals and families with incomes between 133% and 400% of the poverty level to purchase insurance through “exchanges” which will be created the same year. 
• Employers who employ 50 or more full-time “equivalent” employees, do not offer insurance coverage, and have at least one employee who received a “premium tax credit” or insurance exchange “subsidy” (topics for another column) will have to pay a penalty/tax of $2,000 for each full-time equivalent employee (minus 30 employees). 
• Employers who employ 50 or more full-time “equivalent” employees and do not offer “affordable” insurance coverage must pay a penalty of $3,000 per employee receiving the premium tax credit up to a maximum of $2,000 for each full-time “equivalent” employee (minus 30 employees).

This article has highlighted a few of the major tax changes created by the Affordable Care Act for 2013 and 2014.  This article (or any article) should not be relied upon to make tax or financial decisions.  If you would like assistance regarding a particular tax issue or have a question regarding how Health Care Reform may impact you and/or your business’s tax obligations, please feel free to contact our office to consult with a tax professional.

 

 

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