What the Supreme Court’s Historic Move Upholding the Affordable Care Act Means to Your Tax Bill

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The legal battles over health-care legislation began minutes after Obama signed it into law.

Dozens of lawsuits nationwide challenged it. The Supreme Court agreed to hear a suit brought by Florida and 25 other states, as well as a challenge brought by the National Federation of Independent Business. Chief Justice John G. Roberts Jr. said it was the court’s duty to look for ways in which acts of Congress can be upheld, it was found in Congress’ taxing power. Even though it did not pass constitutional muster under the Commerce Clause, the individual mandate requiring people to purchase healthcare has been ruled valid as a tax. Roberts acknowledged that the law refers to the “shared responsibility payment” due on a person’s 2014 tax returns if he or she does not obtain health insurance as a penalty, not a tax. But he noted that it was calculated as a portion of a person’s income and due to the Internal Revenue Service.

And Congress frequently imposes taxes, such as cigarette taxes, to encourage people to quit smoking.

The bigger news here is the impact on the way Americans will receive and pay for medical care.

According to Kevin Reynolds, CPA, Partner-in-Charge of Healthcare Services at Daszkal Bolton, “We now have a dose of clarity regarding the status of healthcare reform. It remains to be seen how large a dose of medicine it is…………..

Employers now know for certain that they must consider the costs and alternatives available for providing coverage to their employees. Providers will now move forward making plans to operate under a new paradigm. Individuals should make sure they understand their new responsibilities related to the direct cost of healthcare, as well as indirect costs such as income tax implications”.

The ACA stipulates that millions of people not currently covered by health care will have insurance by 2016. Now that the Supreme Court upheld the individual mandate, by 2014 uninsured Americans must purchase insurance, or face a fine. Additionally, prior to the ACA, insurers could cherry-pick their insured, excluding those with pre-existing conditions; the new law prohibits insurance companies from excluding pre-existing conditions, and allows people to purchase insurance from state insurance exchanges.

People who don’t have insurance through work or are not covered by other avenues such as Medicaid can purchase insurance through what are called Affordable Insurance Exchanges. The law also has a provision to help those people pay for insurance through a health insurance premium tax credit, which will be advanced during the year to help subsidize the cost of the monthly insurance premium. The subsidy will first be available in 2014, and doled out by the federal government.

So what does this mean for someone who wants to buy insurance through an exchange or elects to go it alone?

First, eligibility for the health insurance premium tax credit is determined by your current income and family situation. Much of that same information also will be on your 2012 return filed next year. However, additional factors will be used to determine the amount of the credit applied to the insurance premium.

Second, the credit operates as federal financial assistance that will cover some or the entire monthly premium paid directly to the health insurance provider. Individuals who choose to remain uninsured could face a penalty – which could decrease any potential tax refund.

Who will the Winners be:

* Hospitals: Hospitals gain by having to provide less free care for the uninsured; currently, 25% of the care provided by hospitals goes unpaid, an amount that will decrease substantially under the new law. Hospitals also stand to gain additional business from the estimated 33 million people that will be added to the rolls of the insured.

* Insurers: Insurers stand to gain under the individual mandate provision by not having to pick up the tab for the uninsured. Additionally, by getting millions of young people into the risk pool, insurers will be able to offset the expense of insuring older Americans.

Who will the Losers be:

* Medical Device Makers: Now responsible for an excise tax of 2.3% on the sale of medical devices, which is expected to add $29 billion to federal coffers over the next 10 years.

* Large Employers: Employers with more than 50 employees who do not currently provide insurance to employees and stand to pay a fee of $2,000 per full-time employee.

* Wealthy Taxpayers: Medicare payroll taxes will increase for some high-income earners, and a new Medicare surtax will be levied on investment income. Investors who think they may fall into these categories should contact us about strategies to mitigate these taxes.

Key Point:The health-care legislation introduces Medicare surtaxes that increase taxes for higher-income individuals.

Two distinctly different increases take effect at the start of 2013.

The first surtax is on earned income. For 2013 and forward, the additional Medicare tax of 0.9 percent applies only to joint filers with wages above $250,000 ($125,000 for married couples filing separate returns) and single filers over $200,000. Their employers pay nothing extra. The levy also applies to individuals with self-employment income above the thresholds.

The second surtax drastically changes the rules. The legislation expands it to certain kinds of investment income. For 2013 and later years, the new tax of 3.8 percent kicks in only when modified adjusted gross income (MAGI) exceeds specified amounts. It’s the same as AGI for almost all individuals except for expatriates.

The 3.8 percent tax applies only to joint filers with MAGI above $250,000 ($125,000 for married couples filing separate returns) and single filers with MAGI over $200,000. Even then, it’s imposed on the smaller of a person’s net investment income or the amount by which MAGI exceeds the threshold amounts of $250,000 ($125,000) or $200,000.

The legislation defines investment income but there are exceptions, and they’re important! Please contact Kevin Reynolds for more information.

Contact us: This tax, combined with the possible expiration of the Bush tax cuts makes it imperative to do some aggressive tax planning before the end of 2012. We have been continuing to work with our clients on developing a deeper understanding of the financial health of their businesses so they can be confident they are working toward optimum efficiency and cost control. Regardless of mandates by law, that’s good business sense in any environment. For additional information, please contact Kevin Reynolds, CPA, Partner-in-Charge of Tax and Healthcare Services, at 561.367.1040 or [email protected].

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