Health Reform and Taxes
- Published: 12/26/2012
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The election is over. America has decided. The Affordable Care Act remains and will soon alter the shape of American health care. Those who have taken a wait-and-see attitude regarding the law’s post-election viability are scrambling to parse its 2,400 pages and learning two important facts. First, if everything runs smoothly, many more Americans will have health insurance coverage. Second, the Affordable Care Act places the Internal Revenue Service smack-dab in the center of health care reform.
The Affordable Care Act contains over forty tax-related provisions. Some provisions, such as the Small Employer Health Insurance Credit (enacted in 2010) entice employers to provide insurance to their employees. Others penalize taxpayers who have not purchased insurance and larger employers who do not offer health coverage to their employees.
Although no final Treasury regulations have been released, the certainty of change and the new years’ quick approach have inspired the devotion of today’s column to revisiting some health reform tax changes readers can expect in 2013 and 2014.
- 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. After 2016, the 10% threshold will apply to all individual taxpayers.
- 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 (a tax levied in addition to the existing tax) 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 will not affect most sellers of long-term primary residences, it will affect many selling second homes, rental, and investment properties.
- All United States citizens and legal residents are required to have health insurance or pay a penalty. 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 will be required to provide health insurance to their employees. Employers who do not offer any coverage and have one or more employee who receives a “premium tax credit” or insurance exchange “subsidy” will have to pay a penalty/tax of $2,000 for each full-time employee (minus 30 employees).
- Employers who employ 50 or more full-time equivalent employees and offer insurance but: 1) the insurance offered does not pay for at least 60% of the employee population’s health care costs, or 2) any of the employer’s employees pay more than 9.5% of their family income to purchase the employer’s insurance 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 tax changes required by the Affordable Care Act in 2013 and 2014. This article (or any article) should not be relied upon to make tax or financial decisions. If you would like assistance wading through these new health reform tax regulations, please feel free to contact our office.