Now that the United States Supreme Court has ruled on the constitutionality of the Patient Protection and Affordable Care Act (“PPACA”), President Obama’s signature healthcare legislation, we will all have to become more familiar with the taxing provisions contained within the bill. Beyond the individual mandate, which now has the dubious distinction of being perhaps the most famous “tax” imposed by the PPACA, there are numerous other revenue-raising provisions found within the law’s hundreds of pages of statutes, rules, and regulations.
The vast majority of the PPACA’s revenue raising potential will come from just a few of the many tax increases found in the law. First, will be the increase to the Medicare Hospital Insurance (HI) portion of the payroll tax. This provision will increase the portion for which the employee is responsible from 1.45 percent to 2.35 percent for individuals making more than $200,000 and for married couples making more than $250,000 a year. Combined with the employer’s portion, the total rate will increase to 3.8 percent when this portion of the law takes effect in 2013.
Second, will be the a 3.8 percent tax on net investment income, which will also take effect in 2013. The tax applies to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a threshold amount. The threshold amount is (a) $200,000 for an unmarried individual, (b) $250,000 on a joint return or for a surviving spouse, and (c) $125,000 for a married person filing a separate return. Net investment income includes most investment income items qualifying as gross income, less properly allocated deductions. Specifically, net investment income items include interest, dividends, annuities, royalties, rents and net gains from disposition of nonbusiness property. Net investment income does not include self-employment income or social security benefits. Nor does it include distributions from tax-favored retirement plans, i.e., from IRAs, Roth IRAs, qualified retirement plans, tax-sheltered annuities, and eligible exempt organization and state/local government plans.
Finally, there is a new 40 percent excise tax on “cadillac” health insurance plans. This new tax will apply to health plans valued in excess of $10,200 for individuals and $27,500 for families. Those thresholds will grow annually by inflation plus 1 percent. This tax takes effect in 2018.
Besides these major revenue raisers, the PPACA has numerous other provisions that will change what we as individuals understand about our tax obligations. For example, the law prohibits reimbursement of expenses for over-the-counter medicine, with the lone exception of insulin, from an employee’s pre-tax dollar funded Health Saving Account (HSA), Flexible Spending Account (FSA) or Health Reimbursement Account (HRA). It also imposes a imposes a cap of $2,500 per year on the amount of pre-tax dollars that could be deposited into FSAs. Finally, it raises the Medical Itemized Deduction Hurdle, which is currently set at 7.5% of adjusted gross income, to 10% beginning in 2013.
The law will also affect the tax treatment of small businesses. Beginning in 2014, the Employer Mandate Tax will impose an annual non-deductible tax on employers with more than 50 employees who do not provide health insurance for their employees. Employers will need to consult with their tax professionals in order to determine how this requirement impacts their business.
Given the enormity of this legislation, it is impossible to predict just how many U.S. taxpayers will be affected by the impending changes. As the impact of PPACA unfolds over the upcoming days, months, and years, Florida taxpayers with questions may wish to consult with a knowledgeable Florida tax attorney in order to understand their obligations under the law now and in the future.