In June 2012, the U.S. Supreme Court upheld the Patient Protection and Affordable Care Act in a split 5-4 decision, stating the act is constitutional and within Congress’ power to tax. Even though there was much discussion of only striking down certain aspects of the law, the entire act remains in place, except for the provision to force states to expand Medicaid eligibility or risk losing Medicaid funding altogether. Also, the provision expanding the issuance of Forms 1099, including the requirement to issue the forms to corporations, was repealed in 2011.
Although the legislation was enacted in 2010, many of its provisions had a delayed start date. Some of the provisions already in effect include the requirement to allow dependents to stay on their parents’ health coverage until age 26 and the disallowance of excluding pre- existing conditions for children under 19.
Health-related provisions scheduled to take effect during the next few years include:
- health insurers must provide coverage to everyone, regardless of gender or pre- existing conditions
- imposition of a penalty to individuals not covered by health insurance
- employers with greater than 50 employees will be required to provide a minimum level of health insurance for employees or pay a penalty
- establishment of health insurance exchanges
- provision of health care vouchers for certain employees who choose to enroll in the state health care exchanges
- imposition of an excise tax on high-cost employer- sponsored health coverage
The PPACA also includes many tax provisions, some of which have already taken effect, such as a credit on the cost of providing health insurance for certain small employers with 25 or fewer employees and limitations on reimbursements from flexible spending plans to prescription medications (i.e. no over-the-counter medications).
Tax provisions scheduled to take effect include:
- requirement to report the value of health care coverage on Form W-2 (2012)
- imposition of an additional 0.9-percent tax on wages and self-employment income of high-income individuals, defined as individuals with earned income in excess of
- $200,000 ($250,000 for
- married couples filing jointly) (2013)
- an additional 3.8-percent tax on unearned income, such as interest, dividends, rents and capital gains (only on high- income individuals based on modified adjusted gross income) (2013)
- increase in the threshold to claim an itemized deduction for medical expenses from
- 5 to 10 percent of adjusted gross income for those younger than 65 (2013)
- decrease in pre-tax contributions to flexible spending arrangements to
- $2,500 (previously $5,000) (2013)
- premium assistance tax credit for lower-income individuals with coverage under a qualified health plan through an insurance exchange (2014)
What will these changes mean to your tax bill, and what can you do now to mitigate this effect?
For many middle- and upper- income families, the changes will mean substantial tax increases. In addition to the new surtaxes on both earned and unearned income, the Bush tax cuts are again scheduled to expire at the end of this year.
There has been much debate in Washington surrounding the extension of these tax cuts; however, as of publication date, there has been no resolution. Because many of the tax-related changes in the PPACA take effect in 2013, there are still a few months to take action.
Capital gains – Consider realizing capital gains in 2012 while the long-term capital gain tax rate is generally 15 percent and before the additional
3.8-percent surtax kicks in. On a $10,000 long-term capital gain, the additional tax, if you wait until next year, could be $880. Conversely, consider deferring capital losses until 2013 as they will be worth more next year if you can offset against capital gains.
Tax exempt interest – Consider investing in tax- exempt vehicles. With overall tax rates increasing and the additional 3.8-percent surtax on unearned income, tax-exempt interest will become even more attractive. Tax-exempt interest is not subject to the surtax.
Stock options – Consider exercising stock options. Because they are considered compensation, stock options will be subject to the additional 0.9-percent Medicare tax in 2013.
Medical expense deduction – Consider doing any elective medical procedures in 2012 if you are younger than age 65 and think these expenses will exceed the deduction threshold of 7.5 percent of your adjusted gross income. Next year, the threshold for those younger than 65 will be 10 percent.
Credit for health premium costs – Employers with up to 25 employees with average annual wages less than $50,000 should consider whether they are eligible to claim a credit of up to 35 percent for 2012 and 2013 (50 percent for tax years beginning after 2013) of their contributions toward their employees’ health insurance premiums.
In summary, now is the time to act to mitigate the effect the additional taxes outlined above will have on your cash flow.
For questions about this topic or to discuss your company's needs, please contact us at Email or 215.441.4600.