As many of you are aware, on March 23, 2010, the Patient Protection and Affordable Care Act, was signed by the President. This is also known as Obamacare. Although, constitutionally questioned, the Supreme Court upheld the Act in the most part and many of its provisions will go into effect in 2013. The purpose of the Act was to expand insurance coverage to near universal and this is to be done by a Health Care Mandate.
The funding method for Obamacare is several miscellaneous taxes, such as an indoor tanning excise tax of 10% and prohibitions on using Flexible Spending Accounts for non-prescription drugs and non-medical HSA withdrawals penalty of 20%. The other funding methods are a Medicare Earnings Tax and Investment Earnings Surtax.
In 2013, the Flexible Spending Account contribution maximum will be $2500.00. Also in 2013, the medical deduction floor will go from 7.5% of the Adjusted Gross Income to 10% of the Adjusted Gross Income however, for seniors this restriction will not take effect until 2016.
In 2014, the individual mandate kicks in and there will be a non-compliance tax of $0.00 for low earners to $4500.00, which is the bronze plan cost for those earning over $200,000. Finally in 2018, there will be a 40% tax to the insurer on “Cadillac” or high-premium health plans.
The Medicare Earnings Tax which is currently 1.45% on all “earnings” will stay at 1.45% in 2013, for those earning up to $200,000. If your earnings are above $200,000 they will be taxed at 2.35% and the employer does not match the .9% increase. Earnings are classified as wages, such as W-2 income or self-employment income.
The Investment Income surtax will be 3.8% in 2013 and this surtax will be on investment income above the threshold amount. The tax will be 3.8% on the lesser of the investment income OR the excess of the adjusted gross income over the threshold. The thresholds are $200,000 for a single person or head of household filer. For married filing joint, the threshold is $250,000. For married filing separate, the threshold will be $125,000. For trusts and estates, the threshold is $12,000.
Investment income includes interest, dividends, annuity distributions, rents, passive royalties, passive activity income and capital gain on disposition. Investment income does not include W-2 income, self-employment income, social security income, distributions from IRAs and Qualified Plans, Gain on Active Interest in S Corp/Partnership, and non-taxable income, such as disability income, Section 121 income, municipal bonds, gifts, etc.
Some strategies to reduce the surtax, may be a Roth IRA conversion, installment sale, Charitable Remainder Trust or shift to tax-free investments.
SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.