guest commentary by David Potts
Potts is a certified public accountant with more than 25 years experience (Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.)
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Since June 28, the date the Supreme Court ruled on the constitutionality of the Patient Protection and Affordable Care Act and the mandate requiring individuals to purchase health insurance or pay a penalty, I have noticed the phrase “twenty-one new taxes” used over and over again by journalists and commentators on Fox News, on CNN, in newspapers, and in magazine articles.
Anytime a journalist reports on the court’s opinion and its effect on Americans, they refer to the “twenty-one new taxes” passed by the Affordable Care Act. Based on questions I have been asked and lunch conversations I’ve been involved in, these taxes are an emotional topic causing many people great distress. However, these same journalists and commentators seldom list or itemize or explain for their listeners and readers the “twenty-one new taxes.”
I'm a CPA and when these journalists used the "twenty-one new taxes" phrase, I had no idea of what this list consisted. There is nothing in the Affordable Care Act that says "here is the list of the “twenty-one new taxes.” Curious as to what list these journalists were referring, I did a little research.
From what I can find, the list of “twenty-one new taxes” originated with a blog post by someone named Ryan Ellis on Jan. 14, 2011 on the website of the organization Americans for Tax Reform. Now I’m sure Ryan is a nice fellow. He might be a bit biased, but that’s OK. I am too. I too believe that I can manage my money better than the government.
But why would all these nationally recognized journalists quote a secondary and not very correct source over and over and over again when they could very easily go to the primary source, the tax law, and give us some useful analysis? Since I seldom heard anybody list the “twenty-one new tax laws”, I thought I might quickly list them for you.
There are many provisions in the Affordable Care Act not on this list, some of which were tax credits or tax reductions. Not that this makes anybody feel better, but a list of “twenty-one new taxes” posted on some blog is a poor way to analyze the impact of the Act. Since Stuart Varney and others are stuck on this list, I’ll stick to it too.
On this list over one-half of the “twenty-one new taxes” listed won’t directly affect 99% of us. Some provisions are no longer applicable and others were new reporting requirements, not new taxes. Let’s just get them out of the way by acknowledging they are on the list, agree not to stress over them, and then move on. These provisions are:
• Tax on Medical Device Manufacturers
• Tax on Indoor Tanning Services
• Blue Cross/Blue Shield Tax Hike
• Excise Tax on Charitable Hospitals
• Tax on Innovator Drug Companies
• Tax on Health Insurers
• $500,000 Annual Executive Compensation Limit for Health Insurance Executives
• Employer Reporting of Insurance on W-2 (not a tax)
• Corporate 1099-MISC Information Reporting (repealed)
• Codification of the “economic substance doctrine” (not a tax)
• Elimination of tax deduction for employer-provided retirement Rx drug coverage in coordination with Medicare Part D
Next let’s discuss the provisions that might affect some of you, but in my opinion aren’t real belly busters. But maybe that’s because they don’t affect me. These provisions are:
• Excise Tax on Comprehensive Health Insurance Plans
Employer-sponsored health coverage that exceeds a threshold amount is scheduled to be subject to a 40% excise tax starting in 2018.
• Medicine Cabinet Tax
Already in effect, over the counter medicines no longer come under the definition of qualified medical expenses for the purposes of flexible spending accounts, health reimbursement arrangements, health savings accounts, and Archer Medical Saving accounts.
• Additional Tax on HSA/MSA Distributions
The provision is in effect for 2011. If you have a health savings account or an Archer medical savings account, and if you spend the money in these accounts for expenses other than qualified medical expenses, the penalty for doing so has increased from 10% to 20% in the case of a HSA and from 15% to 20% in the case of a MSA.
• Flexible Spending Account Cap
Beginning in 2013, contributions to health flexible spending accounts are reduced to $2,500 from $5,000.
• Medical Deduction Threshold
Beginning in 2013, the threshold to deduct medical expenses as an itemized deduction increases to 10% from 7.5%.
Finally we get to the most significant provisions on the “twenty-one new taxes” list. Keep in mind that I am talking about the Internal Revenue Code. As a courtesy and so you won’t have to keep reading this article for the next several days, I am only giving you the most basic description of each provision, a description that is not going to be all-inclusive of each definition, calculation, and/ or exception. If you feel that one of the provisions listed below might affect you, talk with a tax professional so you can plan to minimize the impact.
• Individual Mandate
The individual mandate, perhaps the most controversial of the provisions, simply states that beginning in 2014 all Americans must have health insurance or pay an additional tax or penalty. The minimum penalty will be, for each adult in the household, $95 for 2014, $325 for 2015, and $695 for 2016. After 2016, the minimum penalty is indexed for inflation. For many households the penalty will be greater and is calculated by applying a percentage rate to the amount in which the household’s income exceeds the income tax filing threshold. The total penalty amount cannot exceed the national average of the annual premiums of a "bronze level" health insurance plan offered through health exchange ... whatever a bronze level is.
• Employer Mandate
Beginning in 2014, if a business has 50 or more full time equivalent employees and doesn’t provide these employees with health insurance that provides minimum essential coverage, the employer may be subject to a shared responsibility payment. This provision is sure to encourage small businesses ... by keeping them small.
(I’m sorry. After writing just this little bit about these new tax provisions, I just have to divert a moment and express my debt of gratitude to our great leaders in Washington. I understand that many of you might have the worries and the pressures of whether you have a job next week, but as a tax professional, I will never have to worry about having a source of income. God bless America! God bless Congress! God bless our President! Excuse me. I didn’t mean to get carried away.)
• Medicare Tax on Investment Income
Beginning next year, a 3.8% Medicare contribution tax on unearned income takes effect for individuals within income in excess of $200,000 and married couples with income in excess of $250,000. Currently individuals with earned income in excess of the Social Security limit pay a Medicare tax rate of 2.9%, with 1.45% paid by the employer and 1.45% paid by the employee. The insult is that high income earners will now have to pay a higher Medicare tax on not only wages, but also interest, dividends, annuities, royalties, rents, and gains on the sale of investments. This tax increase will affect a great number of ordinary people.
• Medicare tax increase
Beginning in 2013, an additional 0.9% Medicare tax is imposed on wages and self-employment income. The additional Medicare tax is imposed on individuals with income tax in excess of $200,000 and married couples in excess of $250,000.
Now you know what taxes make up the “twenty-one new taxes” to which the pundits have been referring the past two weeks. You probably now know more about this list of new taxes than these pundits.
But this list is far from a complete analysis of the impact of the Affordable Care Act on your life. It will be years before this becomes clear. Keep in mind, with change comes opportunity. If you have an entrepreneurial bent, many new business opportunities may present. Stay alert and observe the changes.
Oh! And stay healthy. There probably won’t be enough physicians to go around.