Five new taxes related to healthcare reform go into effect January 1, 2013
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There are 20 new or higher taxes related to PPACA. Phasing-in of these new taxes began in 2010, with additional taxes phasing-in through 2018. Effective January 1, 2013, below are the 5 new taxes related to PPACA with an estimated impact of $258 billion in tax increases:
- Medical Device Tax ($20 billion tax increase) — A new 2.3 percent excise tax will be on gross sales, even if the company does not earn a profit in a given year. Impacts: Medical device manufacturers are part of the small business sector and employ 409,000 people in 12,000 plants across the country. The tax will impact job creation, research and development, and increase healthcare costs related to medical devices.
- Flexible Spending Account (FSA) Cap ($13 billion tax increase) — The 30-35 million Americans who use a Flexible Spending Account (FSA) at work to pay for their family’s basic medical needs will face a new government cap of $2,500 on FSAs. Currently the accounts are unlimited under federal law, though employers are allowed to set a cap. Impacts: The new limit will reduce pre-tax savings and the first-day availability of funds to pay for healthcare expenses. A particular group that will be impacted will be the parents of special needs children. According to the National Child Research Center, tuition rates for special needs children can exceed $14,000 per year and these expenses are FSA eligible. The $2,500 cap will limit the options available to these parents.
- Surtax on Investment Income ($123 billion tax increase) — This is a new, 3.8 percentage point surtax on investment income earned in households making at least $250,000 ($200,000 single). The capital gains rate will increase from15 to 20 percent, and the tax rate on dividends will increase from 15 to 39.6 percent. Impact: This is a direct marginal tax increase on retirement savings and those that invest in the growth of small business.
- Medical Itemized Deductions ($15.2 billion tax increase) — Currently, those Americans facing high medical expenses are allowed a deduction to the extent that those expenses exceed 7.5 percent of adjusted gross income (AGI). This tax increase imposes a threshold of 10 percent of AGI. Impact: By limiting this deduction, healthcare reform widens the net of taxable income for the sickest Americans. This tax provision will most harm near retirees and those with modest incomes but high medical bills.
- Medicare Payroll Tax ($86.8 billion tax increase) — The Medicare payroll tax is currently 2.9 percent on all wages and self-employment profits. Under this increased Medicare Payroll Tax, wages and profits exceeding $200,000 ($250,000 in the case of married couples) will face a 3.8 percent rate instead. Impact: This is a direct marginal income tax increase on small business owners, who are liable for self-employment tax in most cases.
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DISCLAIMER: Because of the generality of this update, and based on particular situations, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice, financial advice and/or the advice of a licensed insurance or certified human resource professional.
© Connelly, Carlisle, Fields & Nichols 2012