Salt Lake City CPA Health Care
HEALTH CARE
President Obama’s second term is expected to see the continuing implementation
of the Patient Protection and Affordable Care Act (Affordable Care Act). Many
tax-related provisions in the Affordable Care Act are scheduled to take effect
in 2013 and beyond, including:
• ▪ 3.8 percent Medicare contribution tax (2013)
• ▪ 0.9 percent additional Medicare tax (2013)
• ▪ $2,500 contribution limit on health flexible spending accounts (2013)
• ▪ Increased threshold for itemized medical expenses (2013)
• ▪ New tax on medical devices (2013)
• ▪ State health insurance exchanges (2014)
• ▪ Individual shared responsibility payments (the individual mandate) (2014)
• ▪ Employer shared responsibility payments (2014)
• ▪ Premium assistance tax credit (2014)
• ▪ No annual dollar limits on health insurance coverage (2014)
• ▪ Increase in small employer health insurance tax credit (2014)
• ▪ New tax on “Cadillac” health insurance plans (2018)
Comment
In 2012, the GOP-controlled House attempted to repeal all or parts of the
Affordable Care Act, but the bills died in the Democraticcontrolled Senate. It
is unclear if this pattern will be repeated in 2013. The House GOP has strongly
signaled its opposition to the IRS’s proposed regulations on the Code Sec. 36B
premium assistance tax credit and is likely to continue to oppose them. The
GOPcontrolled House may also try to reduce funding to the IRS and other federal
agencies responsible for implementing the Affordable Care Act.
Comment
The U.S. Supreme Court upheld the Affordable Care Act’s individual insurance
mandate in NFIB v. Sebelius, 2012-2 ustc ¶50,573. However, opponents argue that
the employer’s shared responsibility payment was not addressed by the Court in
NFIB v. Sebelius. Some taxpayers have also challenged the Affordable Care Act’s
contraceptive provisions.
Medicare Contribution Tax
The Affordable Care Act imposes a 3.8 percent Medicare contribution tax on the
unearned income of higher-income individuals, estates and trusts effective
January 1, 2013. The Medicare contribution tax applies to net investment income
(NII), and will generally apply to passive income. The Medicare contribution
tax also applies to capital gains from the disposition of property. For
individuals, the Medicare contribution tax will apply to the lesser of the
taxpayer’s NII or the amount of “modified” adjusted gross income (AGI
with foreign income added back) above a specified threshold.
IMPACT.
The modified AGI thresholds for individuals are $250,000 for married taxpayers
filing jointly and surviving spouses; $125,000 for married taxpayers filing
separately; and $200,000 for single taxpayers and heads of household. These
threshold amounts are not indexed for inflation.
IMPACT.
The Medicare contribution tax is not applicable to income derived from a trade
or business, or from the sale of property used in a trade or business.
NII for purposes of the Medicare contribution tax includes gross income from
interest, dividends, annuities, royalties, and rents, provided this income is
not derived in the ordinary course of an active trade or business; gross income
from a trade or business that is a passive activity (within the meaning of Code
Sec. 469); gross income from a trade or business of trading in financial
instruments or commodities; and net gain (taken into account in computing
taxable income) from the disposition of property that is not held in an active
trade or business.
Comment
The IRS is expected to issue guidance about the 3.8 percent Medicare
contribution tax before year-end.
IMPACT.
Higher-income taxpayers also are faced with a top rate on ordinary income of
39.6 percent and a 20 percent capital gains rate if the President follows
through on his campaign promise to allow the Bush-era tax cuts to expire for
these higher-income taxpayers. That creates an effective top rate of 43.4
percent on all NII-taxed income, except capital gains, which will be taxed at a
23.8 percent effective top rate.
Additional Medicare Tax
The Affordable Care Act also imposes an additional 0.9 percent Medicare tax on
higher-income individuals, effective January 1, 2013. The additional Medicare
tax applies to total wages, other compensation, and self-employment income that
exceeds the applicable threshold amount for the individual’s filing status.
IMPACT.
The threshold amounts are (not adjusted for inflation): $200,000 for
individuals; $250,000 for married couples filing a joint return; and $125,000
for married couples filing separate returns.
Itemized Deduction for Medical Expenses
For tax years beginning after December 31, 2012, the Affordable Care Act
increases the 7.5 percent threshold for itemizing medical expenses to 10
percent. However, the Affordable Care Act temporarily exempts individuals age
65 and older from the 10 percent threshold.
Comment
Taxpayers (or their spouses) who are age 65 or older before the close of the
tax year may continue to apply the 7.5 percent threshold for tax years ending
before 2017.
Comment
For AMT purposes the itemized deduction threshold for medical expenses remains
unchanged at 10 percent.
Health Flexible Spending Arrangements
After 2012, the Affordable Care Act caps the maximum salary reduction
contribution to a health flexible spending arrangement (health FSA) at $2,500.
Salary reductions in excess of $2,500 will subject the employee to tax on
distributions from the health FSA. The $2,500 limit will be indexed for
inflation for tax years beginning after December 31, 2013.
Comment
Effective January 1, 2011, the Affordable Care Act prohibited health FSA
dollars from being used to reimburse the cost of over-the-counter medicines
(except insulin).
Medical Devices
The Affordable Care Act imposes a 2.3 percent excise tax on the sale of
qualified medical devices by manufacturers, producers and importers after
December 31, 2012.
IMPACT.
The excise tax does not apply to many medical devices that are commonly
purchased by consumers such as eyeglasses, contact lenses, hearing aids and
other devices generally sold to the public at retail for individual use.
(Salt Lake City CPA Health Care)