In late June, the U.S. Supreme Court upheld the individual insurance requirement of President Obama's healthcare plan. The plan, which is called the Patient Protection and Affordable Care Act (PPACA) was first approved in 2010 and is still in the process of being implemented. Here is an overview of how some of the reforms will affect taxpayers going forward.
SEE: Personal Income Tax Guide
Surtax on Interest
Perhaps the most significant tax will be on investors in the form of a 3.8% surtax on interest, dividend and capital gains income for households making at least $250,000 ($200,000 single). The tax is set to kick in on Jan. 1, 2013. The surtax will also apply to rental income, royalties, interest and some annuity income. Current exclusions to the surtax include social security benefits, pension payments, life insurance proceeds, municipal bond income and war veteran benefits.
If the Bush-era tax cuts also expire, the highest income tax rate will return to 39.6%, which is up from 35% currently. This means that higher-income individuals will see a top income tax rate of 43.4%, including the 3.8% surtax. Roth IRA conversions and distributions from traditional IRAs can also trigger the surtax, in certain instances based off if the conversion pushes individuals into higher tax brackets. Right now, this applies to individuals earning above $200,000 annually or couples that make more than $250,000 each year. Another important point is the surtax only applies to income amounts above these base earnings levels.
For individuals and couples earning above these amounts, there will also be an increase on Medicare Part A tax rates of 0.9%. Also starting in January 2013, there will be a $2,500 limit to the contributions that individuals are able to make into flexible spending accounts (FSA). FSAs let individuals put away pre-tax dollars for eligible medical expenses. The limit will increase annually based on a cost of living adjustment. The penalty for making non-medical withdrawals from these FSAs will also double to 20%, up from 10% previously.
Another somewhat significant change will be the threshold for itemizing deductions for unreimbursed medical expenses. The previous threshold was 7.5% of adjusted gross income, but will rise to 10% come Jan. 1, 2013. A number of the bill's requirements have already kicked in and include a 10% tax for individuals that go to indoor tanning beds. More minor implementations include biofuels credits, which may qualify as pork-barrel legislation or another form of adding items to a bill not directly related to healthcare. Finally, there have also been restrictions to the deductibility of health insurance for executives and individuals that make more than $500,000 annually.
Excise Tax on Medical Devices
Healthcare firms are also seeing a number of increased taxes as a result of the PPACA legislation. Dec. 31, 2012 will see the medical device industry hit with a 2.3% excise tax on the sale of medical devices. And starting in January 2014, the health insurance sector will see sizable annual fees that will run into the tens of billions of dollars. The fee is set to open at $8 billion in 2014 and rise above $14 billion in 2018.
SEE: Buying Private Health Insurance
The Bottom Line
Individuals interested in reading the PPACA in its entirety can do an Internet search for "HR3590", which is the bill's official reference name. It weighs in at a remarkable 906 pages in total. Combined with other potential tax rises, including an increase in the individual tax rate and expiration of lowered tax rates on capital gains and dividend income, the tax hit for individuals in the U.S. is set to become much more cumbersome. Parties opposed to the tax increases have vowed to fight, or roll back the taxes that have already been implemented. At best, they might be able to secure another temporary freeze on the coming rises. The results from the upcoming Presidential elections should provide some more clarity on the issue, but for now it may be best to plan for the worst, as in higher healthcare taxes, but hold out hope that there will be relief for individual taxpayers.