Tax Consequences of the Supreme Court Health Care Ruling

Numerous tax provisions now need to be considered in your 2012 tax planning as a result of the June 28 U.S. Supreme Court’s ruling on the constitutionality of the Patient Protection and Affordable Care Act of 2010. Indeed, the overall constitutionality of the law was decided based on Congress’ right to tax the American people as the Court ruled that the individual mandate was not a legal command to buy insurance, but rather a tax on the choice to forgo buying insurance. Whether you call it a tax or a penalty, be prepared see an impact on your taxes if you are subject to the requirement and choose to ignore it.

We discussed the tax consequences in our 2010 briefing entitled “Healthcare Impact” at www.wblcpa.com/news-room. However, we will mention some of the key items that will affect the upcoming 2013 tax year:

Additional Medicare Tax for Payroll: For earned income in excess of $200,000 ($250,000 married filing jointly), the Medicare tax will be raised .9% from 1.45% to 2.35%. Fortunately, employers do not have to match it. But, employers must withhold the extra amount, which could create a tax due surprise at tax return time for married employees since the withholding is only based on the employee income while the tax is based on their joint earned income. Self-employed individuals will see a corresponding increase in SE tax to 3.8% on income above $200,000 ($250,000 married filing jointly). Note that this provision is in addition to the 2% tax increase scheduled for 2013 when the payroll tax cut enacted by the Middle Class Tax Relief and Job Creation Act of 2012 expires.

New Medicare Tax for Investment Income: This provision is getting the most press. Investment income will be subject to a new 3.8% Medicare tax for those with adjusted gross income (AGI) of $200,000 ($250,000 married filing jointly). For this purpose, investment income includes interest, dividends, investment capital gains (long and short term) royalties, rents and income from passive activities. Estates and certain trusts will also be subject to the tax. Note that this is in addition to the increase in tax rates should the so-called Bush tax cuts not get extended before the end of the year. See our June, 2012 Summer Tax Updates at www.wblcpa.com.

Increased Restrictions on Medical Deductions: Deductions for medical expenses on Schedule A will generate a tax benefit only if they exceed 10% of AGI, up from 7.5%, making this deduction further out of reach for many. Note that the adjustment does not kick in until 2017 for taxpayers (and spouses) 65 years and older.

Elimination of Deduction for Medicare-Related Subsidy: For (typically large) employers who maintain prescription drug coverage for retirees and get a subsidy for helping keep retirees off the Medicare Part D subsidy rolls, the deduction they claim in connection with the subsidy will be eliminated.

Excise Tax on Medical Device Manufacturers: A tax equal to 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of the device. Guidance on this provision indicates that this excise tax will be more widespread than initially thought.

There are other provisions that will be effective beginning in 2014 and beyond. In fact, the actual penalty (or tax, per the Supreme Court) for remaining uninsured is not effective until 2014. Under this rule, individuals not eligible for Medicaid, Medicare or other government-sponsored coverage will be penalized/taxed for not carrying minimum health care coverage equal to the greater of $95 ($395 for family) per year or 1% of income, imposed on a monthly basis. It climbs in 2016 to the greater of $695 ($2085 for family) per year or 2.5% of income imposed on a monthly basis. Prisoners and undocumented aliens are exempt.

Provisions implemented prior to 2012 that continue to remain valid under the Health Care Act include the 10% tax on indoor tanning services and the requirement that dependent child(ren) be allowed to stay on their parents’ health insurance until they turn 26.

Tax planning will be critical for 2012 and we stand ready to assist. If you have any questions about any of the provisions in the Act or would like to discuss your specific situation, please contact us.

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