Paying for the Affordable Care Act

With every new Government rule, mandate or law there is a price to be borne by the taxpayer. The Patient Protection and Affordable Care Act (PPACA), enacted in 2010, has set in motion many changes to the tax laws as well as to health care delivery in this country. Many of the most far-reaching changes are scheduled to take effect after 2013 but as many taxpayers already know, much of the pain is being felt on your 2013 tax returns in the form of higher taxes. I will tackle a few of those higher taxes here.

Many taxpayers are feeling the pain in the form of their itemized deductions being partially phased out as well as seeing phase outs of their personally exemptions. These are what I call stealth taxes because they increase your tax by phasing out what you used to be able to deduct in prior years. Legislators however take great pride in saying these are not technically tax increases. Whatever you want to call it, it will cost you more in tax! In addition we are facing an entirely new tax called the Net investment income (NII) surtax. Effective for tax years beginning after December 31, 2012, there is a new 3.8 percent surtax on net investment income. The surtax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. The threshold amounts for individuals are $250,000 for married couples filing joint returns, $125,000 for married couples filing separate returns and $200,000 for single individuals. The threshold amounts are not indexed for inflation after 2013. The NII surtax is among the most complex provisions in the PPACA and many taxpayers may be unaware of their liability for it.

In addition to the phase outs and the new NII, there is an additional Medicare Tax. In addition to the 1.45 percent employee portion of the hospital and hospital service insurance (HI) tax imposed on wages, 0.9 percent tax will be imposed on individuals who receive wages or self-employment income in excess of $200,000 ($250,000 for married joint filers, and $125,000 for married separate filers). These excess wages are subject to a total HI rate (combined employer and employee portions) of 3.8 percent. If the additional HI tax is not withheld by the employer, the employee is responsible for paying the tax. This additional HI tax does not qualify for the one-half of self-employment taxes above-the-line deduction from income. These provisions apply with respect to remuneration received, and tax years beginning, after December 31, 2012.

There is also an additional tax on HSA and Archer MSA distributions. The PPACA increased the additional tax on distributions made from HSAs not used for qualified medical expenses from 10 percent to 20 percent of the amount includible in gross income. Similarly, the additional tax on distributions made from Archer MSAs not used for qualified medical expenses increased from 15 percent to 20 percent of the amount includible in gross income. These provisions apply to distributions made after December 31, 2010. Health FSAs offered in cafeteria plans will also be affected. For tax years beginning after December 31, 2012, a Health Flexible Spending Arrangement is not a qualified benefit under a cafeteria plan unless the plan provides for a $2,500 maximum salary reduction contribution to the FSA. If the plan does allow salary reductions in excess of $2,500, then an employee is subject to tax on Health FSA distributions. You will also lose a portion of the tax benefit for out of pocket medical payments made by you. The PPACA increased the threshold for the itemized deduction for unreimbursed medical expenses from 7.5% to 10% of adjusted gross income (AGI) for tax years beginning after December 31, 2012. A temporary waiver of the increased threshold applies to tax years beginning after 2012 and before 2017 for individuals who are age 65 and older before the close of the tax year.

Lastly, beginning in 2014, the PPACA imposes a shared responsibility payment on applicable individuals who fail to carry minimum essential coverage for themselves and their dependents. Individuals who are covered by employer-provided health insurance or by Medicaid, Medicare, and certain other government health care programs are generally deemed to have minimum essential coverage. There are also exemptions to the individual mandate that cover religious conscience exceptions and individuals who are present in the U.S. but are undocumented. Additionally, certain short gaps in coverage will not trigger the shared responsibility payment. The Supreme Court upheld the individual mandate in June 2012.

As you can see this new law is very complex and as tax returns begin rolling out this year, many taxpayers have found some unwanted surprises in their tax filings. Schedule an appointment with a member of my tax team to help navigate these treacherous waters and insure that you don’t have a PPACA surprise on your 1040.