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New Taxes Under The Affordable Care Act

Author: Jacob Davis

The Affordable Care Act (ACA) has changed the healthcare insurance landscape. Some of the most important changes stemming from Obamacare center around taxes. Under the ACA, the total amount of new taxes on individuals and businesses will climb to $500 billion by 2023.

Altogether, there are 21 new taxes linked to the ACA, some of them tax hikes and some of them tax breaks for U.S. healthcare consumers.

Not surprisingly, those tax changes are geared toward credits for low-income Americans and tax hikes for higher earners (people who earn $200,000 annually on an individual basis, or $250,000 for an annual family income).

Small business owners with annual incomes over $250,000 can also expect some changes to their tax bill, and not in a positive way.

Here's a snapshot at how it breaks down:

  • The federal government estimates that 85% of all Americans who already have health insurance won't face any, or at least any significant, changes to their taxes.
  • Uncle Sam also estimates that of the remaining 15%, the tax changes revolve around three key pillars to the ACA - the individual mandate, the employer mandate and tax credits linked to healthcare exchange plan premium costs for individual Americans, families and small business owners.
  • There is an outlier. Americans who had previously invested in healthcare savings accounts (HSAs) and flexible savings accounts (FSAs) will also see new limits on healthcare-related tax deductions.

For most Americans, the biggest tax issue comes from the individual mandate, which states that U.S. adults who can afford to do so must sign up for healthcare, either directly through an insurance company, or via a state or federal healthcare insurance exchange.

There are some exceptions.

  • If the premium from the lowest-priced bronze plan purchased through a health insurance exchange in his or her home state is more than 8% of the purchaser's household annual income, an exception is granted.
  • The purchaser's annual household income is below the threshold for IRS tax filing statutes.

Also, some Americans may be granted a tax exemption for religious beliefs, not being a U.S. citizen, being in prison, or belonging to an American Indian tribe.

Of the specific, remaining ACA-related tax issues, here are some that may have the most impact on working Americans.

  • Tax on income - A new $123 billion tax on investment income, which took effect in January 2013, places a 3.8% surtax on investment income on households with more than $250,000 in annual income or $200,000 for individuals.
  • Individual mandate - A new $65 billion tax on both the individual mandate and the employer mandate, which took effect in January 2014.

Anyone who doesn't buy qualifying health insurance will have to pay an income surtax. This extra tax is calculated by taking the higher of the listed percentage of adjusted gross income (AGI) or the dollar figure shown below:

1 Adult

2 Adults

3+ Adults

2014

1% AGI/$95

1% AGI/$190

1% AGI/$285

2015

2% AGI/$325

2% AGI/$650

2% AGI/$975

2016 +

2.5% AGI/$695

2.5% AGI/$1,390

2.5% AGI/$2,085

: PPACA Legislation, pages 317-337

On the employer side, companies with 50-or-more employees face taxes of $2,000 (non-deductible) for not offering health coverage, per employee.

Cadillac tax - A $32 billion excise tax on so-called Cadillac health insurance plans favored by more affluent Americans. The tax applies to healthcare plans valued at $10,200 for individuals, and $27,500 for family plans. The tax takes effect on Jan. 1, 2018.

High bills tax – The ACA brings with it a $15 billion tax on individuals who take a deduction based on having high medical bills. The old threshold of expenses exceeding 7.5% of AGI is replaced with a threshold of 10%, as of January 2013. From 2013-2016, Americans 65-and-over are exempt from this tax.

Health savings accounts tax – The ACA places a cap limit on flexible spending accounts of up to $2,500 (there currently is no cap on such plans.) There's also a new tax, estimated at $5 billion, called the medicine cabinet tax, where U.S. adults cannot use health savings accounts, flexible spending accounts or health reimbursement pre-tax dollars to buy non-prescription, over-the-counter medicines.

Indoor tanning tax – This tax, which went into effect in July 2010, placed a 10% excise tax on U.S. indoor tanning salons. It's expected to bring in $2.7 billion in new tax revenues.

High-risk tax - An annual $63 fee levied by Obamacare on all plans (decreased each year until 2017 when pre-existing conditions are eliminated) to help pay for insurance companies covering the costs of high-risk pools.

Medicare tax - Paul Jacobs, a Certified Financial Planner (CFP®) with Palisades Hudson Financial Group, Atlanta office, says there's a new 0.9% Medicare surtax applied to wages and self-employment income over $200,000 for individuals and $250,000 for married couples. While employers will collect this tax in most cases by withholding from the employee's paycheck, certain taxpayers who either switch jobs during the year or hold multiple jobs may be surprised to see they owe additional tax with their 2013 returns, he says.

Medicare tax on investments - A new 3.8% Medicare tax on investment income could impact many Americans, especially higher-income Americans. According to the IRS, the 3.8% tax on net investment income applies to unincorporated taxpayers (basically individuals, estates, and certain trusts) who have modified adjusted gross income (MAGI) in excess of these annual income levels:

  • $250,000 in the case of married taxpayers filing a joint return or a surviving spouse
  • $125,000 in the case of a married taxpayer filing separately
  • $200,000 for everyone else, except estates and trusts, where the threshold is equal to the highest amount at which the maximum tax rate begins (in 2013 it was projected to be $11,950).

The Bottom Line

People may not realize it, but amidst all the controversy about how Obamacare was rolled out, there is a bevy of taxes awaiting Americans. It's in your best interests to know about those taxes, and consult a tax specialist to minimize any financial damage.

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