Tax Provisions – Health Care Debate and Supreme Court

As most of us know, the Supreme Court recently finished hearing arguments regarding the Affordable Care Act (ACA), more widely known as Obamacare. The Supreme Court evaluated three key questions:

1. Can there even be a lawsuit given that a 'tax' cannot be challenged until actually paid? Or is the mandate a 'penalty?'
2. Is the individual mandate to purchase health insurance constitutional?
3. Can the law survive if portions (e.g. the individual mandate) are ruled unconstitutional?

The purpose of this post is not to debate the merits of the Supreme Court argument or to advocate for or against health care reform, rather it is to serve as a reminder regarding the tax provisions contained in the law that may, or may not, survive depending on how the Supreme Court ultimately rules.

The only tax—if it is a tax at all—that relates directly to the mandate is the penalty people would owe for failing to buy insurance. Whatever the High Court does to the mandate, it will be interesting to learn whether the justices decide this levy is in fact a tax or a penalty. The Obama Administration is firmly on both sides of this question, as are the opponents of the law. This penalty starts at $95, or 1% of income, and rises to $695, or 2.5% of income, by 2016. Families have a limit of $2,085 and exemptions are available for financial hardships.

The ACA includes some important tax cuts—generous credits aimed at subsidizing small businesses that buy insurance for their employees. These credits apply to businesses with fewer than 25 employees and range between 35% to 50% of the cost of health insurance. There are also provisions to lock in health care premium rates for small businesses.

The law includes several tax increases, including a new excise tax on high-value employer sponsored health plans (starting in 2018) and a provision that makes it tougher for people to itemize deductions for their medical costs. Generally, this is a 40% excise tax on plans with more than $10,200 / $27,500 in single / joint coverage. It also raises the adjusted gross income floor for medical expenses from 7.5% to 10%.

Two other tax increases are worth noting. They are often labeled hikes in the Medicare payroll tax, although the biggest has nothing to do with either Medicare or payrolls.

• The first is a 0.9 percent increase in the Medicare wage tax for high-income workers. This would help finance the senior health system.
• The second is a new 3.8 percent tax that high-income households will have to pay on income from investments and other non-wage sources. Sometimes called Medicare surtax, its real purpose is to bankroll some of the costs of the ACA.

Combined, in 2013 the two new levies would raise taxes for households making between $500,000 and $1 million by an average of about $4,600 and boost taxes for those making at least $1 million by more than $41,000. These estimates are relative to current law, where the 2001/2003 tax cuts expire at the end of 2012.

These taxes will hit incomes in excess of $250,000 for couples ($125,000 for singles). But because that threshold is not indexed for inflation, the number of households facing these taxes will nearly double over the next decade, from 2.4 percent of all taxpayers in 2013 to 4.6 percent in 2022.