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The Supreme Court recently ruled that the Patient Protection & Affordable Care Act (PPACA) is constitutional. So what does this mean for taxpayers? A lot. Almost every taxpayer–whether they currently have or do not have insurance–will be affected. Below is a list that will impact taxpayers the most:
Before PPACA, through the end of tax year 2012, healthcare expenses are deductible to the extent that they are greater than 7.5% of your Adjusted Gross Income (AGI). AGI is the bottom line on the first page or the first line on the second page of your Form 1040.
The change coming for tax year 2013 is that the limit is now going to be 10% of your AGI. So, if you have an AGI of $80,000 and deductible healthcare expenses of $10,000 – in 2012 this would result in a healthcare deduction of $4,000 ($10,000 minus $6,000 – where $6,000 is 7.5% of $80,000). In 2013, this deduction for the same expenses would be reduced to $2,000 ($10,000 minus $8,000 – where $8,000 is 10% of $80,000).
This is likely the tax change that will impact the most people – of nearly all tax brackets. For 2013 this change will only impact filers under age 65 – those folks will get this new limit applied beginning in 2017.
For single filers with incomes above $200,000, a new payroll tax will be applied to income above $200,000. The same applies for couples with joint income above $250,000. This payroll tax is equal to 0.9% of the income in excess of the $200,000 or $250,000 level.
With the same levels as above ($200,000 and $250,000) applied to Modified Adjusted Gross Income (AGI), there will be an additional 3.8% Medicare surtax. This is applied to the lesser of the taxpayer’s net investment income or the excess Modified AGI above the limits.
Modified AGI is defined in this case as AGI plus tax free foreign income. Investment income includes all interest, dividends, capital gains, annuities, royalties and passive rent income, but does not include tax free interest or (very importantly) distributions from retirement plans.
Note: This is the tax that is often referred to as the “tax on the sale of your home". See the article Tax On the Sale of Your Home Email Mythfor more details on why this is mostly bunk – there are real impacts to this bit of tax law, just not what is described in the email.
Healthcare Flex-Spending Accounts will be subject to a cap of $2,500 in annual deductions with the new law. Before there wasn’t a specific cap, but you were also required to use up the deferred amounts within 3 months of the end of the year. The jury is still out on whether or not the “use it or lose it" provision will be removed with the new cap – recommendations have been put forth to allow taxpayers to carry over unused amounts, but none have made it to law as of yet.
In addition to all of the above, folks who choose to remain uninsured will be subjected to a penalty of the larger of $95 or 1% of income above the threshold that requires the individual (or couple) to file an income tax return. For a family in 2013, this penalty is capped at $285. The cap for the penalty will increase gradually (albeit steeply) over the next few years to a maximum of $2,085 in 2016.
Folks in the lower strata of incomes (generally less than household income of around $96,000) will receive tax credits to help them pay for insurance coverage. The way this credit works too complicated to go into here, but an example would be for a family of four with an income of $48,000 would receive a credit of roughly $11,000 toward healthcare insurance coverage.
If a company with 50 or more employees provides no insurance to its employees or the insurance provided is substandard or too costly, there is an additional penalty to the company. The penalty is stiff: $2,000 times the number of employees, with a 30-employee offset. This penalty will apply if even one employee goes outside of the company-offered plan to an insurance exchange for coverage.
Many medical devices, such as wheelchairs and prosthetics (an official list is forthcoming from FDA), will be subject to a new excise tax of 2.3%. This will not be applied to items that are typically sold in a retail setting, such as eyeglasses, contact lenses, and hearing aids.
IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, unless explicilty stated to the contrary, any U.S. federal tax advice provided not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party, any partnership, investment plan, arrangement, legal structure or other transaction addressed herein.