Taxes and fees associated with the Affordable Care Act

The US Supreme Court recently ratified the Affordable Care Act (sometimes called ‘Obamacare’) and this will have an impact on taxes for some individuals & businesses. In response to several questions from clients, I’m posting a few things that will happen over the next few years.

Please note that this article is written as of July 12, 2012 – tax laws change frequently and considering the contentiousness of this issue, new rules & complete law changes may take place so be sure to check back for updates.

Beginning in 2013, the following things are scheduled to happen:

  • If you itemize medical expenses, the ‘floor’ for deducting these expenses will go up to 10% of Adjusted Gross Income from 7.5% for filers under 65.  This will mean more people will not be able to write off their medical expenses.  People aged 65 and older will still be at the 7.5% floor until 2017 when their floor jumps to 10% as well.  There is no guidance if a joint return is filed and one filer is over 65 and the other is under 65 and expect we’ll see an answer soon as to what happens in this instance.
  • Flexible spending account payins will be capped at $2,500 per year.
  • People who earn higher amounts will be paying a .9% surtax if their income exceeds certain levels – $200,000 for singles and $250,000 for married.  Self-employed individuals also will be hit with this surcharge.  Please note this is for wages/earnings above the thresholds so a single who earns $300,000 in a year will pay the surcharge on $100,000 and at .9%, that amounts to a tax increase of $900.
  • Certain unearned income (interest, dividends, capital gains, royalties, passive rental income and annuities) are subject to a 3.8% surtax with Adjusted Gross Incomes above $200,000 (singles) or $250,000 (married).  Please note that payouts from Retirement Plans and tax-free interest are NOT included in this category and are not subject to the surtax.

Beginning in 2014, these additional items are scheduled to begin:

  • Insurers will have to pay a fee of $8 billion to the IRS – that is $8,000,000,000 from all insurers in the US (Blue Cross, Advantage Health, Humana, etc.) and this fee will be divided up between those companies (exactly how is still in the works.)  I’m guessing the insurers will pass along this increase to consumers as an increase in policies but that is speculation on my part.
  • Individuals who do not have health insurance will be charged a ‘penalty tax’ of the larger of $95 or 1% of their income above a filing threshold (currently the amount of income that means that they have to file an income tax return or not).  Families will be capped at $285.  This penalty tax goes up dramatically in the following years and is projected to be capped at $2,085 in 2016 (up from $285).  There are provisions for people with lower-to-moderate income levels will get a tax credit to offset this penalty.
  • Employers with 50 or more full time employees that don’t offer health plans (or offer sub-standard plans or plans that are deemed ‘too costly’) will get hit with an excise tax if even a single employee gets the credit mentioned in the bullet point above (meaning the employee gets a tax credit to offset the penalty tax).  This excise tax on the business is $2,000 times the number of employees, with a 30 employee offset (so a company with 55 full time employees would pay $2,000 on 35 employees – or $70,000!!).  The excise tax goes up to $3,000 per employee if any employee buys insurance from an insurance exchange instead of participating in the company sponsored plan.  This excise tax is considered a non-deductible expense and can not be used as a deduction on their taxes.

There are other provisions scheduled for 2018 and beyond, but most deal with coverage limits for “Cadillac” plans and the laws are not too clear right now – discussing these changes now would be premature.

A lot of people will be hit with some of the surtaxes or the potential loss of deducting medical expenses.  For a detailed look at your individual situation, don’t hesitate to contact me.

I welcome your comments & feedback.


Thomas C. Hodge, CPA


The Hodge Group

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