Health Reform and Taxes
- Published: 10/11/2013
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Since the Affordable Care Act’s inception in 2010, most professionals in the tax community have stood on the sidelines awaiting an outcome in the legislative contest between the Act’s backers and detractors. Knowing this outcome was necessary in order for most tax professionals to justify investing the time and resources necessary to actually decipher the law’s 2,000+ pages that legislators admittedly did not read before passing.
Over the past three years, some provisions of the Affordable Care Act have been delayed. Other provisions have been waived for certain groups. Many provisions, however, have plodded steadily ahead, including the individual mandate requiring average Americans to have health coverage. The opening of the state health insurance exchanges on October 1st precedes this 2014 requirement.
Suddenly , those who have taken a wait-and-see attitude regarding the law’s viability are scrambling to learn the effect of the 2,000 page law’s 20,000+ pages (a number that varies widely depending on the printer’s font size and political affiliation) of regulation. The important thing to note here is that health care reform will directly impact the lives of every reader and place the IRS squarely in the middle of the administrative process. In upcoming months, I hope to highlight how particular tax changes related to health care reform will impact American families and businesses. In today’s column, I will highlight some health reform tax changes that have occurred in 2013 and can be expected next year.
Tax Changes - 2013:
- The 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. Previously, there was no limit on employee salary deferrals.
- A new 2.3% tax on medical devices, used by physicians or implanted in patients (from tongue depressors, to bedpans, to replacement knees), will be charged. This 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 new 0.9% Medicare surtax (a tax levied in addition to the existing tax) will be charged for individuals earning wages of over $200,000 per year and couples with combined wages exceeding $250,000 per year.
- A 3.8% Medicare surtax will be charged for 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 can affect those selling second homes, rental, and investment properties.
Tax Changes - 2014:
- All United States citizens and legal residents will be 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 (currently $23,550 for a family of four) to purchase insurance through “exchanges” which will be created the same year.
Employer Mandate and Penalty Delayed to 2015:
On July 2, 2013, the Treasury Department announced a delay in the employer mandate from January 1st 2014 to January 1st 2015. The Employer Mandate is highly complex and requires a great deal of calculation, information, and a flow chart to work through. But, it essentially boils down to: (1) employers being required to offer coverage and (2) that the coverage be affordable:
Mandate to Offer Coverage:
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 employees who receive 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).
Mandate to Offer Affordable Coverage:
Employers who employ 50 or more full-time equivalent employees and offer insurance will be required to 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) if either of the two following conditions exist:
- the insurance offered does not pay for at least 60% of the employee population’s health care costs, or
- any of the employer’s employees pay more than 9.5% of their family income to purchase the employer’s insurance.
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.