As you are probably aware, the Supreme Court, in a controversial 5-4 decision, upheld a new tax law on June 28, 2012. The ACA is 2,700 pages long, including 600 pages of tax provisions. Faced with reading this, Supreme Court Justice Scalia humorously invoked the Eighth Amendment to the Constitution, which forbids cruel and unusual punishment!
We will simplify how this new law, the largest tax law change in 20 years, affects you and your business. Key provisions include:
- Individuals must buy a minimum level of health insurance or pay a penalty with their tax return in 2014
- Medical deductions have been reduced – the floor rises from 7.5% to 10%
- Increased Medicare taxes to 3.8% for taxpayers earning more than $200,000 – this also affects some taxpayers who are selling real estate
- Increased Medicare taxes on self employment income and wages
- Decreased allowable contributions to flexible spending accounts
- Companies with more than 50 employees must provide health insurance
Here are the Key Provisions
The Ruling – The law was passed as a tax (allowed under Article 1 of the Constitution) and not a penalty even though a majority of the justices found that some of the legislation went beyond Congress’s powers under the Constitution. The Court concluded that the Act was not a legal command to buy insurance, but rather a tax on the choice to forgo buying insurance. The Supreme Court did however, strike down the provisions that would allow the Federal government to terminate state funding for Medicaid.
Penalties – The penalty for not buying health insurance is the minimum of:
- 2014 – $95 per adult or 1% of household income
- 2015 – $325 per adult or 2% of household income
- 2016 – $695 per adult or 3% of household income
- Insurance companies will not be allowed to deny coverage or charge higher premiums for pre-existing conditions.
- People in the same age group will be the same premium regardless of heath status.
- Limits will exist on spending for out-of-pocket expenses for deductible, co-insurance and co-payments.
Increased Taxes –Medicare Tax & Medical Deduction
- Individuals that have adjusted gross income in excess of $200,000 ($250,000 if filing jointly) will pay a 3.8% tax on net investment income in excess of these amounts. Net investment income includes interest, dividends, capital gains, passive income. It does NOT include muni bond interest, retirement income, active business income, and gain on sale of business assets in active businesses.
- Sale of real estate that is not in an active business IS subject to this. If you are selling your personal residence, the gain must be greater than the existing exclusion for the sale of your primary residence ($250,000/$500,000 MFJ).
- Medical deductions must now exceed 10% of adjusted gross income (formerly 7.5%).
Other Key Provisions
- Companies with more than 50 full-time employees must provide health care coverage to employees or face penalties of up to $3,000 per employee.
- Flexible spending accounts – the maximum contribution decreases from $5,000 to $2,500 as of 2013.
- The requirement to file 1099’s for payments to corporations was repealed
- Insurance will be available from exchanges provided by state or federal governments.
- Subsidies are available for tax payers earning $44,680 ($92,200 for a family of four).
When Does Everything Become Effective?
- Adoption credit increased and refundable (expires 2012)
- 35% health insurance credit for small business (25 or fewer employees and average annual wages of $50,000 or less)
- 50% credit on therapeutic discovery
- Health insurance for children under 27 (can be covered by parents)
- 10% tax on indoor tanning services
- No over the counter drugs in health plans
- New employer simple cafeteria plans
- 20% penalty on HAS/FSA non-qualified distributions
- W-2 reporting on employer health plan
- 10% haircut on medical deduction
- $2,500 maximum contribution for FSA’s
- 0.9% Medicare tax increase on SE income and wages
- 3.8% Medicare tax on unearned income
- Refundable premium assistance credit
- Health insurance required for businesses with more than 50 employees
- Penalties for individuals who do not have health insurance
- Reporting of health insurance coverage
- Health exchanges will be established by States
- 40% excise tax on Cadillac health plans (if coverage exceeds threshold amount)