On March 23, 2010, President Obama signed into law HR 3590, the Patient Protection and Affordable Care Act, a massive law reforming the health care industry. A separate bill, HR 4872, the Health Care and Education Reconciliation Act of 2010, modifies HR 3590 and was signed into law by the President on March 30. This summary highlights some of the major tax-related changes found in found both pieces of legislation.
Among other things, the new laws mandate that individuals maintain health insurance coverage and mandates that employers provide health insurance coverage for their employees. You can download the full text of HR 3590 (906 pages, PDF format) from the GPO Web site. Robert Longley over at the US Government Info site has a summary of insurance and Medicare related changes. Rosemary Peavler over at the Business Finance site answers questions about how the health care reform bill impacts small businesses.
There are a number of tax provisions in the Patient Protection and Affordable Care Act. Some of the tax provisions increase taxes, other provisions provide tax breaks, or limit or changes various tax benefits. The tax changes will impact nearly every single taxpayer, individuals as well as businesses.
Here's a quick summary of some of the tax changes:
There's an increase in the Medicare tax for high income earners. Currently the Medicare tax rate is a flat 2.9% on all wage income, with both the employer and the employee paying exactly one-half of this amount. Starting in 2013, the flat 2.9% Medicare tax will continue to apply to wages under $200,000 (or under $250,000 for married couples filing a joint return). There will be an additional 0.9% Medicare tax on wages over $200,000 ($250,000 for joint filers). This additional tax is to be withheld from wages, or if not withheld, it is to be paid directly by the employee. This additional Medicare tax also effects self-employed persons paying the self-employment tax.
Additional Medicare tax on investment income. HR 4872 modifies the health care act to impose the expanded 3.8% Medicare tax on investment income for people with income over $200,000 (or $250,000 for joint filers). Investment income for the purposes of the Medicare tax base would include interest, dividends, royalties, rent, passive activity income (such as income passed-through from partnerships and S-corporations), and gain from the sale of property. This additional Medicare tax is technically called the unearned income Medicare contribution tax.
Tax credit for smaller businesses to provide health insurance coverage. Businesses employing 25 employees or less may become eligible for tax credits of up to 35% based on employer-paid health insurance premiums. Larger employers who fail to provide health insurance coverage may become liable for tax penalties.
Tax penalty for individuals who fail to maintain adequate insurance coverage. Individual persons will be required to maintain adequate health insurance coverage starting in the year 2014. There's some new terminology here: minimum essential coverage. This term is defined in the newly added section 5000A of the Internal Revenue Code. Health insurance provided by employers, Medicare and Medicaid coverage, and individually-purchased insurance will generally meet the definition of "minimum essential coverage." Individuals will also be able to keep their existing health insurance policy as providing essential minimum coverage under a grandfathering provision. Individuals who don't maintain continuous health insurance coverage will become liable for tax penalties: $95 per person in 2014, $325 per person in 2015, $695 per person in 2016, and adjusted for inflation after that. Lower-income persons will be exempt from the requirement to maintain coverage. Also exempt are people who have a religious conscience objection to insurance coverage.
Tax credits to help purchase health insurance for lower-income people. Individuals and families earning between 133% and 400% of the federal poverty level will be eligible for tax credits to subsidize the cost of health insurance coverage. The credits will in effect cap the cost of health insurance premiums between 2% and 9.5% of total household income. Medicaid coverage would be expanded to include individuals earning less that 133% of the federal poverty level.
Flexible spending arrangements for health care expenses are reduced. FSA contributions will be reduced to $2,500 maximum starting in the year 2013.
Health savings accounts will have increased penalties for non-medical withdrawals. The current 10% penalty is doubled to 20% for any withdrawal or distribution that made for non-medical expenses. Similarly, the penalty for non-qualifying distributions on Archer medical savings accounts raises from 15% to 20%.
The floor on the medical expense deduction raises to 10%. Currently, out-of-pocket medical expenses are tax-deductible to the extent the expenses exceed 7.5% of a person's adjusted gross income. Starting in 2013, only medical expenses that exceed 10% of AGI will be tax-deductible.
Adoption tax credit increases to $13,170 and is extended through the year 2011. Also, the adoption credit is now refundable.
Economic substance doctrine is codified as law. Basically, the economic substance doctrine means that a tax strategy can be disallowed as abusive if the taxpayer's economic situation apart from the person's tax liability does not change in any substantial way. There's automatic penalties ranging from 20% to 40% for engaging in tax strategies that do not meet this definition.
Expanded information reporting for health insurance coverage. The Internal Revenue Service will be in charge of monitoring that individuals have health insurance coverage, assessing penalties for failing to maintain adequate coverage, and for paying tax credits to subsidize insurance coverage for lower-income people. There will also be information shared between the IRS and the Department of Health and Human Services, particularly to screen health care providers for tax compliance problems and to recover tax debts owed by health care providers directly from HHS payments.
Information reporting for income payments of $600 or more expanded to include corporations. Currently, businesses are required to issue a Form 1099-MISC to report various types of payments, primarily issued to individuals. Starting in 2012, this requirement is expanded to include gross payments of $600 or more to both corporate and non-corporate recipients, and are further expanded to include both payments for services and for property.
The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an exchange.