Tax Provisions of the Affordable Care Act

The Affordable Care Act, often referred to as Obamacare, was enacted on March 23, 2010. Some of its tax provisions are in effect and more will be implemented during the next several years. Earlier columns addressed the 3.8% net investment income surtax and the individual and employer mandates and their respective penalties. There are many more tax provisions included in the Affordable Care Act:

Taxes

Additional Medicare Tax

A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual's wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual's filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately, and $200,000 for all other taxpayers.

Medical Device Excise Tax

There is a new 2.3 percent medical device excise tax that manufacturers and importers will pay on their sales of certain medical devices starting in 2013. The tax is extremely broad-based and applies to almost any FDA-registered device that is intended for human use - everything from MRIs to tongue depressors.

The Indoor Tanning Services Tax

Since July 1, 2010, folks using indoor tanning salons faced a new 10 percent excise tax. (Say what?)

The Cadillac Health Insurance Plan Tax.

Starting in 2018, there will be a 40 percent excise tax on taxpayers who are covered by high-cost health insurance plans (with premiums at or above $10,200 for single or $27,500 for family coverage).

Credits

Small Business Health Care Tax Credit

This new credit is intended to help small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small business employers to offer health insurance coverage for the first time or maintain coverage they already have.

For tax years 2010 through 2013, the maximum credit is 35 percent of coverage for small business employers and 25 percent for small tax-exempt employers such as charities. An enhanced version of the credit will be effective beginning Jan. 1, 2014. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively. The credit is available to small business employers who pay at least half the cost of single coverage for their employees.

Health Insurance Premium Tax Credit

Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange. Exchanges will operate in every state and the District of Columbia. The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer's insurance company to help cover the cost of premiums.

The portion of the law that will allow eligible individuals to use tax credits to purchase health coverage through an Exchange is not effective until 2014.

Caps and Floors

Health Flexible Spending Arrangements

Since Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. A similar rule went into effect on Jan. 1, 2011, for Health Savings Accounts, and Archer Medical Savings Accounts.

Starting Jan. 1, 2013, employees will face a $2,500 cap on the amount of pre-tax salary deferrals they can make into a healthcare flexible spending account. There was no cap under prior law.

Changes to Itemized Deduction for Medical Expenses

Starting Jan. 1, 2013, taxpayers who face high medical expenses will only be allowed a deduction for expenses to the extent they exceed 10 percent of adjusted gross income, up from 7.5% now. This means that if your taxable income is over $25,000 you can't even put enough in a Health Flexible Spending Arrangement to cover the new floor on deductions. Taxpayers 65 and older can still use the old 7.5% threshold through 2016.

W-2s

Reporting Employer Provided Health Coverage in Form W-2

Employers are now required to report the cost of coverage under an employer-sponsored group health plan on an employee's Form W-2, Wage and Tax Statement, in Box 12, using Code DD.

The amount reported does not affect tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee's income, and it is not taxable. This reporting is for informational purposes only, to show employees the value of their health care benefits.