The Affordable Care Act, or Obamacare for short, may affect some people's tax returns even more than their health. Beginning soon after its enactment in 2010, and extending out to at least 2018, the law includes an array of tax charges, credits, and subsidies affecting individuals, employers, medical service providers, drug companies, health insurers, and other businesses.
Putting aside whether the individual mandate really is a tax, as the U.S. Supreme Court ruled, individuals face six prominent tax changes in the coming years. Details here are from a health reform tax guide published by experts at CCH after the court ruling.
Effective in 2013
Medicare payroll tax. There will be an added Medicare payroll tax for high-income individuals in 2013. In addition to the present Medicare tax, which is 1.45 percent of wage earnings, there will be an additional 0.9 percentage point tax. It will apply to individuals who receive more than $200,000 in wage income in 2013 and to couples earning more than $250,000 (or $125,000 for married people filing an individual tax return). Only earnings above the threshold levels will be taxed at the higher rate. If for any reason this tax is not withheld by an employer, the individual employee will be obligated to pay it directly.
Medicare investment tax. These same higher-earning individuals and households will also be required to pay a 3.8 percentage point tax to Medicare on any net investment income they receive during the year. Also often called unearned income, such gains are defined by CCH as including:
"Gross income from interest, dividends, annuities, royalties and rents unless such income is derived in the ordinary course of any trade or business (excluding a passive activity or financial instruments/commodities trading); other gross income from any passive trade or business; and net gain included in computing taxable income that is attributable to the disposition of property other than property held in any trade or business that is not a passive trade or business."
Medical expense tax deduction. Taxpayers who itemize their deductions can only deduct the amount of unreimbursed healthcare expenses that exceeds 7.5 percent of their adjusted gross incomes. This threshold will rise to 10 percent of AGI for spending in 2013. However, individuals and spouses who are 65 and older before the end of their 2013 tax year (which is the same as the calendar year for most taxpayers) will be able to retain the 7.5 percent expense rule through the 2016 tax year.
Effective in 2014
Tax penalty for not having insurance. There are many rules covering who must have health insurance under the individual mandate.
The individual penalties for not having health insurance are set to begin small and rise in 2015 and again in 2016, when they will reach their full level. A person can be penalized for individual months in a year when they were not covered. Here are the full-year rates of the penalties:
In 2014, it will be $95 per adult and $47.50 per child, up to a family maximum of $285 or 1 percent of family income, whichever is greater.
In 2015, it will be $325 per adult and $162.50 per child, up to a family maximum of $975 or 2 percent of family income, whichever is greater.
In 2016, it will be $695 per adult and $347.50 per child, up to a family maximum of $2,085 or 2.5 percent of family income, whichever is greater.
Tax credit for health insurance. The state health insurance exchanges to be set up under the law will offer large tax credits to consumers who qualify. Individuals and families who earn between 100 and 400 percent of the national poverty level are eligible for the credits if they buy insurance through an exchange. The nonpartisan Congressional Budget Office estimates the credit will average about $5,000 a year per tax return, which includes individuals and families.
Effective in 2018
Health insurance excise tax. This steep 40-percent tax will be levied on so-called expensive "cadillac" health plans. The tax is not paid by the individual but by the insurance provider. But it could have an impact on the premiums and availability of these plans. The tax would be levied on premiums above threshold levels that were set at $10,200 for individual policies and $27,500 for policies covering multiple family members. These figures will be adjusted upward to reflect increases in healthcare costs that occur between now and when the tax takes effect in 2018.