Reasons to be Concerned About Obamacare - Taxes

by Lowell L. Kalapa, Tax Foundation of Hawaii

The shut down of the federal government pivots on which side will blink first, the President or the House Republicans and it all comes down to whether or not there will be a willingness to delay the implementation of the Affordable Care Act otherwise known as Obamacare.

Adopted nearly two and a half years ago, it was supposed to roll out this October with actual coverage to begin on January 1 of 2014. However, there are already horror stories of glitches in the sign up process as apparently the software and pricing of the plans that are to be offered have not been available. In other cases, some folks who already have their own insurance plans are discovering that their current plans are being cancelled by insurance carriers and they are being offered plans where the premiums are substantially more than their old or current plans.

One thing that we hear that causes much concern is the requirement that all individuals must have health care insurance or face a penalty that they will have to pay when they file their income tax return next year. What is it and can the federal government really slap taxpayers with a penalty for not having health insurance?

Well, beginning in 2014 all individuals lawfully present in the U.S. must maintain a minimum amount of health insurance coverage and if they do not, they will have to pay a $95 per adult excise tax, or 1% of income, whichever is greater. The tax would be half that amount for an uninsured, under-insured child up to a maximum of 300% of the adult tax per household. The penalty increases to $325 (or 2% of income) per adult in 2015 ($162.50 per dependent) and to $695 (of 23.5% of income) per adult in 2016 ($347.50 per dependent). Non-compliance would be subject to criminal penalties. This excise tax will be phased in over the next years until 2016 after which the amount of the tax will be indexed for inflation.

Currently unreimbursed medical expenses can be used as an itemized deduction on individual tax returns if the amount exceeds 7.5% of the taxpayer’s AGI. That threshold will be increased to 10% beginning in 2013. This is the deduction for medical expenses currently claimed on Schedule A of the individual taxpayer’s return. For high income earners, there is an additional “hospital insurance tax” of 0.9% that will be tacked onto the current Medicare tax of 1.45% for a total of 2.35% on the employee while the employer’s portion will remain at 1.45%. The total contribution to Medicare will be 3.8%. The thresholds when the additional tax kicks in will be when wages are in excess of $250,000 for couples; $125,000 for married individuals filing separately, and $200,000 for individuals. It will also apply to the self-employed. The entire 3.8% rate will also apply to investment income such as capital gains, dividends, and rent and royalty income when the thresholds are exceeded. The additional tax will apply beginning this year. While employers will not be liable for the additional tax if they fail to withhold it, they will be responsible for any penalties imposed for the failure to withhold the additional tax.

Although the IRS has issued guidance on the withholding of the additional Medicare tax - that is the employer is to start withholding the tax in the pay period when the employee’s compensation exceeds $200,000, the additional withholding is applied to all income in excess of the threshold. This may be a challenge for an employer where the spouse works for another company or where a single individual may hold two jobs which, if combined, would put that employee over the threshold.

For those who have a flex plan that reimburses health care benefits, that reimbursement must not exceed $2,500 per year beginning with this year. Costs incurred for non-prescribed, over-the-counter medications are no longer eligible for reimbursement from a flex plan.

There will be a new tax on medical devices manufactured or imported of 2.3% starting in 2013. This is one of the major points of contention in the budget stalemate as it is a new tax on medical devices that will just raise the cost of health care.

An excise tax would be imposed on “Cadillac” health plans which are valued in excess of $10,200 for individuals and $27,500 for families. The tax would be 40% of the plan’s value. The income thresholds would be indexed for inflation plus 1%. The tax takes effect in 2018. Surprisingly, many of the health care plans negotiated under collective bargaining contracts and those available to Hawaii workers could fall into this trap.

These are but some of the tax traps that the Affordable Care Act has created and they are a good reason to stop and give pause.

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