OUR THOUGHTS ON:

Tax Provisions in the Patient Protection and Affordable Care Act - What Will They Mean to You?

Health Care|Tax

By Ron Kramer

President Obama has signed the Patient Protection and Affordable Care Act (“the Act”) passed by the House of Representatives late Sunday, March 21. Now, the separate package of modifications to the Act contained in the Health Care and Education Tax Credits Reconciliation Act of 2010 (“the House Reconciliation Act”) heads to the Senate to face the reconciliation process that could allow it to pass by a simple majority vote.

The package of health care reform will raise nearly $400 billion over 10 years through tax increases targeting high-income individuals, excise taxes on high-cost group health plans and new fees on selected health care-related businesses. A current tax analysis of the provisions contained in the health care reform package is complicated by the fact some of the provisions contained in the Act will be modified or changed by the House Reconciliation Act. Accordingly, we have to first examine the provisions of the Act and then separately examine the modifications that the House Reconciliation Act would make to those provisions.

Because of the many and complicated tax provisions contained in health care reform legislation, we will limit discussion in this Insight to the provisions that target high-income individuals. Additional tax provisions will be discussed in future Insights.

Medicare tax increases under the Patient Protection and Affordable Care Act (“the Act”)

Beginning in 2013, the Act imposes an additional 0.9% Medicare Hospital Insurance Tax (“HI tax”) on all earned income in excess of $200,000 for individuals, and $250,000 for joint filers. Thus, the HI tax rate increases from the current 1.45% to 2.35% on earnings above those income thresholds.

The increased tax applies only to the wage earner or self-employed person and does not increase the employer’s portion of the HI tax. However, the employer will have withholding responsibility. It should also be noted that, unlike the wage cap on Social Security wages, neither the $200,000 nor the $250,000 threshold for additional HI tax is indexed for inflation. In addition, self-employed persons cannot deduct any portion of the additional tax.

The table below shows how the Medicare tax increase will affect some high-income earners: 

 

 

 

Single Taxpayer
 
Joint Return
 
 
 
 
 
 
 
Earnings
 
Additional HI Tax
 
Earnings
 
Additional HI Tax
$200,000
 
 -
 
$200,000
 
-
$250,000
 
     $450
 
$250.000
 
-
$300,000
 
$900
 
$300,000
 
       $450
$400,000
 
$1,800
 
$400,000
 
$1,350
$500,000
 
$2,700
 
$500,000
 
$2,250
$1,000,000
 
$7,200
 
$1,000,000
 
$6,750

 


As noted above, the additional HI tax applies to wages received or self-employment income earned in taxable years beginning after December 21, 2012. Keep in mind that in addition to the increased HI Tax, higher-income taxpayers will likely face President Obama’s FY 2011 budget tax proposals that will restore the current top ordinary tax rates of 33% and 35% the pre-Bush tax rates of 36% and 39.6%, beginning in 2011.

The House Reconciliation Act - 3.8% Unearned Income Medicare Contribution

The Reconciliation Act includes a proposal to impose a 3.8% Medicare “contribution” tax on the unearned income of high-income taxpayers. Thus, a taxpayer’s gross income from interest, dividends, capital gains, annuities, royalties, rents and income from passive activities would be subject to this tax. Tax-exempt interest would not be taxed under the proposal. Distributions from retirement plans would also be exempt from this tax.

The new Medicare tax would be applied against the lesser of a taxpayer’s net investment income or modified adjusted gross income in excess of $200,000 for individuals, or $250,000 for joint filers.

The new Medicare contribution tax coupled with President Obama’s FY 2011 budget tax proposals would raise the effective tax rate on capital gains and qualified dividends from 20% to 23.8% beginning in 2013. On other sources of unearned income, the maximum effective tax rate would rise from 39.6% to 43.4% in 2013. The new unearned income Medicare Contribution tax would apply to taxable years beginning after December 31, 2012.

Summary

The health care reform package imposes significant new taxes on high-income taxpayers to finance the federal government’s commitment to health care. Other significant tax provisions contained in the new health care legislation will be reviewed in future Insights.

 

 

 

Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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