Tax impact of the health care bill

April 1, 2010: Congress recently passed the health care act. The bill and amendments to it have been signed into law. What does the new law mean for you from a tax perspective?

There are lots of tax changes, such as increased taxes on pharmaceutical companies, medical equipment companies, health insurance companies, hospitals, etc. Refer to the documentation below for a complete list of changes. However, we've listed most of the provisions that affect individuals below. We've tried to go into more detail than you might find elsewhere. Note that various provisions of the bill go into effect every year from now until 2018. The big changes happen in 2013, 2014, and 2018.

2010:

Starting July 1, there will be a 10% tax on indoor tanning.
The senate bill had a 5% tax on elective cosmetic surgery, but the final bill removes this tax.
The adoption credit is increased from $12,170 to $13,170 per child, and is refundable.
- The adoption credit was previously $12,170 per child in 2010, and set to revert to the old rule — $5,000 per child, or $6,000 per special needs child — in 2011. The credit is increased by $1,000 for 2010, and will also be available in 2011. But it will revert to the $5,000/$6,000 rule in 2012.
- The credit is now refundable. Under the 2010 rule, if your total tax due is $7,000 and the adoption credit is $9,000, you would only use up $7,000 of the credit. The remaining credit would be carried over to future years. Under the new rules, the credit is refundable, which means that in our example the government will pay you $2,000. There is no carryover.
- The income limitations to qualify for the credit remain unchanged. The credit is phased out if your income is between $182,520 and $222,520.
If you have fewer than 10 employees and the average annual wage is less than $25,000, you can get a small business tax credit from the government to help pay for employee's health care. The credit is phased out as the number of employees grows to 50 or the average annual wage grows to $50,000. The credit is 35% for for-profit companies, and 25% for non-profit companies. The credit changes in 2014.
You will receive a medicare rebate of $250 if you fall into the coverage gap. Here's how it works.
- Under medicare part D coverage, you pay the first $310 for prescription medicines.
- Thereafter you pay 25% and medicare pays 75% until your medicine costs reach $2,830.
- Thereafter you pay 100% of your medicine costs until the cost reaches $4,550.
- Thereafter medicare pays for almost all of your medicine costs.
- So if are on medicare and fall in the $2,830 to $4,550 range, medicare will give you a rebate check of $250.

2011:

Not part of the healthcare bill, but the Bush tax cuts expire. This will bring in additional revenue. We expect Congress to retain the tax cuts at the lower end of the spectrum, including the standard deduction for married filers as twice that of individuals, as well as the expanded child tax credit.

All tax rates increase. We expect Congress to retain the tax cuts at the lower end of the spectrum. Certain high income filers in California may not be affected much by the tax because they will pay less more regular tax but less AMT.

Old rate	New rate	Likely rate	Single	Married
35%	39.6%	39.6%	$373,651 or more	$373,651 or more
33%	36%	36%	$171,851 to $373,650	$190,551 to $373,650
28%	31%	??	$82,401 to $171,850	$117,651 to $190,550
25%	28%	25%	$34,001 to $82,400	$45,551 to $117,650
15%	15%	15%	$8,376 to $34,000	$11,951 to $45,550
10%	15%	10%	up to $8,375	up to $11,950

The top tax rate on long term capital gains rises from 15% to 20%.
The special rate of 15% for qualified dividends vanishes. Dividends will be taxed as ordinary income.
Various provisions such as the increased standard deduction for married filers, the enhanced child tax credit, etc expire.

You will no longer be able to use FSA's (flexible spending accounts) and HSA's (health savings accounts) to purchase OTC medicines (over the counter medicines) unless prescribed by a doctor. This is the last year to take advantage of the rule!
The penalty for distributions from an HSA not used for qualified medical expenses is increased from 10% to 20%.
Your W2 will report the cost of your health benefits. This is important because later on there will be a 40% tax on health benefits above a threshold.

2012:

The adoption credit reverts to the rules for tax year 2000 — $5,000 per child, or $6,000 per special needs child.
Companies are required to issue 1099-MISC to corporations for amounts over $600.
- Under current law, companies are required to issue 1099-MISC's only to individual contractors. The new law requires 1099-MISC's for pretty much everyone, so it will increase the need for record keeping, and add costs.
- Backup withholding may be required.

2013:

There is an additional 0.9% medicare tax on salary and self-employment income above $200,000 if single, and $250,000 if married. In the current rules there is already a 2.9% tax on salary and self-employment income, half paid by the employer and half paid by the employee.
- If both spouses are working, there is severe marriage penalty because the income threshold for married people is almost the same as the threshold for single people. The threshold should be $400,000 if married, or $125,000 if single if there is to be no marriage penalty.
- Additionally, the threshold amounts are not indexed for inflation, so decades from now everyone will be hit by the tax.
- If you and your spouse each make $180,000, the companies you work for will by default not withhold the extra 0.9%. Yet the extra 0.9% on $110,000 ($360,000 minus $250,000) will be due at tax filing. So you may have to request your employer to withhold more taxes.
- For Schedule C filers, the additional medicare tax is not allowed for the ½ of self-employment tax deduction.
There is an additional 3.8% medicare tax on investment income — interest, dividends, capital gains, rents, annuities, and royalties. You only pay the tax if your income is over the following thresholds: $200,000 if single, and $250,000 if married.
- As above, there is severe marriage penalty if both spouses are working.
- As above, the thresholds are not indexed for inflation.
- While salary, IRA distributions, conversion income, gambling income, and other forms of income are not subject to the medicare tax, they will push your AGI over the threshold, and thus more (or all) of your investment income will become subject to the additional tax.
- Remember to add the foreign earned income exclusion to determine your true income.
- Tax-exempt income from muni bonds will not increase your income.
- Income from schedule K-1 (for partnerships and S corporations) will be considered investment income if the K-1 interest is a passive activity or an investment club. However, capital gain or loss on the sale of the interest will not be subject to the tax.
- If the schedule K-1 interest is for an active activity, then the investment income derived from it will not be be subject to the medicare tax. But, capital gain or loss on the sale of the interest will be subject to the tax.
The maximum contribution to FSA's reduced from $5,000 to $2,500. This limits also apply to dependent care FSA and daycare FSA. The $2,500 is indexed each year for inflation.
Currently, medical expenses above 7.5% of your AGI (adjusted gross income) are deductible. In 2013, only medical expenses above 10% of your AGI will be deductible, thereby reducing the deduction. However, if you are age 65 or older, the level remains as 7.5% until 2016.
- Additionally, under AMT (alternative minimum tax), right now medical expenses above 10% of your AGI are deductible. But after the law takes effect, only the amount above 12.5% of your AGI will be deductible under AMT

2014:

If you have more than 50 full-time employees are required to provide health insurance to their employees. If you work for an employer with at least 50 full-time employees you can expect to have health insurance. The penalty for not providing health insurance to your employees is either $2,000 or $3,000 per employee.
Most everyone else is required to buy health insurance, although there are a few exemptions from the requirement (such as religious objections). If you don't buy insurance, there is a penalty for not buying health insurance which is the larger 1% of your income minus standard deduction and exemptions, and $95 for individuals or $285 for families.
However, if you make less than 4 times the FPL (federal poverty level), the government will provide assistance through the form of credits to buy health insurance. The FPL for 2009 is $10,830 for a single person in California, and $22,050 for a family of 4. See the link “2009 federal poverty levels” at the bottom of this page for all the FPL's, which are different in some states.

Your income in terms of FPL	Amount of your income you must pay
less than 133%	2.00%
133%	3.00%
150%	4.00%
200%	6.30%
250%	8.05%
300%	9.50%
400%	9.50%
more than 400%	no assistance

The small business tax credit introduced in 2010 changes: If you have fewer than 10 employees and the average annual wage is less than $25,000, you still get a tax credit from the government to help pay for employee's health care. The credit is phased out as before. But now the credit is increased to 50% for for-profit companies, and 35% for non-profit companies. But the credit it only available for 2 consecutive years — either 2014 and 2015, 2016 and 2017, etc.
Medicaid is expanded to cover millions. There are no new taxes. The federal government will pay the full cost of the medicaid expansion till 2016, but thereafter states are required to pick up part of the tab.

2015:

The penalty for not buying health insurance is increased to the larger 2% of your income minus standard deduction and exemptions, and $325 for individuals or $975 fir families.
- As in 2014 and all future years, companies with 50 or more full-time employees are required required to provide health insurance.
- As in 2014 and all future years, if you make less than 4 times the FPL (federal poverty level), the government will provide assistance

2016:

The penalty for not buying health insurance is increased to the larger of 2.5% of your income minus standard deductions and exemptions, and $695 for individuals or $2,085 for families. The $695 or $2,085 will be indexed each year to inflation.

2017:

States are required to pay for part of the medicaid expansion introduced in 2014. The percentage is 5%. Expect to see new state income, property, sales taxes. According to an article from the Heritage foundation, it is estimated that California will need to pay $7 billion between 2014 and 2019.

2018:

There is a 40% tax on health insurance plans provided by your company above a threshold. This rationale seems to be that really good health insurance is considered a part of your salary and should be taxed. Under the original house and senate bill, the tax was supposed to start in 2013, but unions pressured the president and congress to push it back to 2018 and institute the 3.8% medicare tax on investment income.
- The thresholds are $10,200 for individuals and $27,500 for families, although it may be increased in the future.
- For high-risk professions the thresholds are increased by $1,650 for individuals and $3,450 for families.
- After 2018 the thresholds are indexed for inflation.
- The 40% tax is not deductible on the company's tax return
States are required to pay for part of the medicaid expansion introduced in 2014. The percentage is increased from 5% to 7%.

2019:

States are required to pay for part of the medicaid expansion introduced in 2014. The percentage is increased from 7% to 10% and it remains this way forever.

Official documentation:

Unofficial documentation:

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