(Released on 12/2/12)
Last week we talked about the possible tax increases that might occur as a result of the “fiscal cliff” if the lame duck congress does nothing; however, what readers should know is that some taxes are already scheduled to rise as a result of the Patient Protection and Affordable Care Act (PPACA).
While much of the public awareness around this precedent setting legislation focuses on mandatory health care insurance, there are serious tax implications in the measure that will go into effect next year. Last week we mentioned that high income earners ($200,000/$250,000) with dividend and capital gains taxes will be hit with an additional 3.8% tax on that income to fund Medicare. In addition, these taxpayers will see their share of the Medicare tax on their wages rise by 0.9% which when added to the current 1.45% paid by all wage earners will make that tax rate 2.35%. While the employers share for Medicare on these high-wage earners will remain at 1.45%, the combined tax rate will rise to 3.8% which is the same rate these taxpayers will pay on dividend and capital gains income. This tax increase is expected to raise $317 billion over the next ten years.
Another new tax will hit manufacturers of medical devices with a tax equivalent to 2.3% of their gross sales. It is estimated that this tax will raise more than $29 billion over the next ten years. Of course, those manufacturers will pass the cost of the tax on to their customers, increasing the cost of medical care.
Those taxpayers with Flexible Spending Accounts will be limited to an annual contribution cap of $2,500 with which to cover out-of-pocket medical expenses. Currently there is no limitation on pre-tax contributions to Flexible Spending Accounts used for medical expenses. It is estimated that this will raise $24 billion over the next ten years.
One tax increase won’t come in the form of a new tax or a rate increase but it will come in the form of a higher threshold for the itemized deductions that taxpayers can take for medical expenses made during the tax year. All taxpayers can currently deduct any medical expenses they made during the tax year as long as they are in excess of 7.5% of their adjusted gross income. Under the Patient Protection and Affordable Care Act, that threshold will rise to 10%. In other words, taxpayers will be able to deduct only those expenses that exceed 10% of their adjusted gross income. It is expected that his change will raise another $19 billion over the next ten years.
Finally, on January 1, 2013 the amount that a health insurance company can deduct for compensation paid to its executives and directors will be substantially reduced. While it doesn’t sound like much, it is estimated that this change will raise $800 million over the next ten years.
Some other changes adopted under this legislation have already gone into effect such as increased penalties for unqualified withdrawals from Health Savings Accounts (HSA) and Archer Medical Savings accounts (MSA). An interesting provision that levies a 10% excise tax on tanning bed services went into effect on July 1, 2010. An annual fee on drug manufacturers went into effect in 2011.
But that is not the end of the taxes and fees adopted under the Patient Protection and Affordable Care Act. A new annual fee on health insurers will kick in beginning in 2014 as well as a 40% tax on expensive health plans that will go into effect in 2018.
The fact that all of these tax increases have been adopted and will go into effect come January 1, 2013 makes the fiscal cliff even more frightening. Will the nation be able to withstand even more taxes on top of those that will come with “Obamacare?” While many of these tax increases are “hidden” from the general public, they, nonetheless, will add to the cost of living for all taxpayers. That is why it is so important that taxpayers understand the gravity of what faces the lame duck Congress in the next few weeks. While everyone seems to agree that it cannot be all spending cuts or all tax increases, policymakers need to be sensitive to the burden already borne by Americans – individuals, families, and businesses. And if policymakers think that they can just make the wealthy taxpayers pick up the tab, they should remember that those who have those resources can also choose where to invest their “riches.”
No one will come out of this crisis unscathed. Taxpayers need to realize that someone has to pay for the programs and services the federal government has grown over the years. Now is the opportune time to rethink how much federal government we really need and for which we are willing to pay.