In a landmark decision, the Supreme Court upheld the president’s signature health-care reform in a 5-4 decision. The court upheld the most controversial aspect of the law, the individual mandate, labeling it a tax and within lawmakers’ power.
So now that the legal uncertainty surrounding the Affordable Care Act has been eliminated, it’s time to delve into the tax implications and when they go into effect.
Refundable tax credit: This is intended to be a form of assistance with the cost of premiums paid under a qualified health plan. Eligible individual’s incomes must exceed 100% but not more than 400% of the poverty level. The Treasury Department is tasked with prescribing rules for calculating the poverty level. Dependents aren’t eligible, and if married, you must file jointly otherwise you don’t qualify. This credit takes effect after Dec. 31, 2013.
Excise tax: This 2.3% tax on manufacturers, producers or importers on the sold price of a medical device is intended to help cover the cost of the sweeping legislation, but some experts worry it will create more paperwork and increase the costs of the goods. The tax goes into effect after Dec. 31, 2012.
Affordable choices of health benefit plans: Employers will be required to provide at least minimal benefits via a health plan to their employees , and additional benefits will be provided to individuals. In order to pay for the requirements, the federal government will make payments to states to set up exchanges. Then the states must make payments to plans on behalf of individuals to defray the cost of the additional benefits. There will be a reporting requirement from the states to the Secretary of the Treasury. A list of all taxpayers who qualify for the premium tax credit generated by plans that don’t provide essential minimum coverage or are not affordable will be provided to the Feds. This is a fail-safe to prevent fraud under the refundable tax credit listed above.
Reduction in deductibles: Individuals with incomes between 100% and 400% of the poverty level will enjoy reductions to their out-of-pocket health-care expenses by two-thirds, one-half, or one-third, depending on their income. These tax breaks go into effect after Dec. 31, 2013.
Small business requirement: The reform requires small business owners with more than 50 employees provide health insurance or face an “assessable payment” equal to one-twelfth of $2,000 times the number of full-time employees. Employers must also file a return documenting whether or not they have complied. Small business must be in compliance or face the fine beginning after December 31, 2013.
Patient-centered outcomes research trust fund: This organization was created to review pharmaceutical medicines to determine if they have sufficient quality and are relevant to patients’ needs. Funding for the organization will come from a $2 fee imposed on each health insurance policy or self-insured plan whose plan year ends after Sept. 30, 2012. The fee is then multiplied by the average number of participants covered in the plan, and will extend to Sept. 30, 2019.
More fees and excise taxes: According to a report generated by the Treasury Inspector General of Tax Administration (TIGTA), a whopping “40% excise tax will be imposed on high-cost, employer-sponsored coverage if the value of coverage exceeds $10,200 (self-only) or $27,500 (not self-only),” to be paid by the coverage provider. The tax on distributions from Health Savings Accounts (HSA) and Archer Medical Savings Accounts for payment of unqualified medical expenses increased to 20% from 10% prior to 2011. A hospital insurance tax of 0.9% will be levied on high-income taxpayers ($250,000 married filing joint, or $125,000 single) effective after Dec. 31, 2012.
Beginning in 2013 the deduction for expenses allocable to Medicare Part D will be eliminated. Also the threshold for deducting medical expenses will increase to 10% from 7.5% of adjusted gross income. So if your medical expenses total $10,000 and your adjusted gross income is $100,000, your medical deduction will be zero. Prior to 2013 you would have enjoyed a $2,500 tax deduction.
Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.