How much will healthcare cost you?
| Published: July 28, 2010 – 4:05 pm
We’ve all heard a million different things about the newly enacted healthcare legislation. The media has only recently begun to relent in its overwhelming coverage of the healthcare bill saga. Along the way the issue invoked a wide range of emotions, from fears about rationing of care, to disgust at sweetheart deals such as the cornhusker kickback, to outrage over the increase in government control over private citizens’ lives.
Whether you fought tooth and nail to stop it or welcomed it with open arms, the healthcare bill ultimately became our new healthcare laws. True, the attorneys general from many states (including Washington’s Rob McKenna) are pressing forward with a lawsuit to challenge the legislation’s constitutionality, citing improper application of the Commerce Clause. As it stands now though, the new legislation is set to have considerable impact on every American’s life as it phases in over the next ten years. This impact will undoubtedly be seen in the manner in which health care is administered in the United States, as well as felt by the wallets of the country’s taxpayers.
The healthcare legislation was widely promoted as imposing new taxes on only the nation’s top earners, those “rich folks” whose income tops $250,000 annually. In reality, it contains several new taxes, increases the rates of existing taxes, and greatly reduces the deductibility of out-of-pocket medical expenses, changes that will also affect people in lower tax brackets. Many of the new taxes impose a significant marriage penalty, assessing taxes on married filers at a lower threshold than single filers. All of these changes will certainly increase the amount of tax paid by middle class Americans, as well as increase the cost of medical care.
The tax established in the healthcare legislation that is expected to raise the most revenue is an increase in the Medicare payroll tax rate, effective in 2013. Individual incomes over $200,000 and married couples’ incomes over $250,000 will be subject to an increase in the employee portion of this tax, from 1.45% to 2.35%. The employer portion of this tax will increase from 1.45% to 2.35% as well. Self employed individuals will pay both portions of this tax at the new 2.35% rate for income over the threshold.
A new Medicare tax of 3.8% will be applied to unearned income for taxpayers whose income exceeds the $200,000/$250,000 threshold. Unearned income, which includes investment income such as dividends and capital gains, had previously been exempt from any Medicare tax. The Bush tax cuts that apply a 15% tax rate (10% for those in the lowest two tax brackets) to capital gains and certain dividends are scheduled to expire in 2011. Long term capital gains will be subject to a higher 20% rate (15% for those in the two lowest brackets), and dividends will be subject to the taxpayer’s highest marginal income tax rate. Because tax cuts on individual income tax rates expire at the same time, dividend income could be subject to rates up to 39.6%, in addition to the increased Medicare tax.
Taxpayers who claim out-of-pocket medical expenses as itemized deductions will be limited to those in excess of 10% of their AGI, instead of the current 7.5%. This change will go into effect in 2013, but taxpayers over 65 years of age (and their spouses) will keep the 7.5% exclusion until 2016. Most people are rarely able to deduct any out-of-pocket medical expenses, simply because these costs don’t ever exceed 7.5% of their income. With the increase to a 10% exclusion, those most likely to be affected are people with disabilities or chronic illnesses who spend a considerable portion of their income on medical expenses.
Also affecting the deductibility of medical expenses is a revision to the rules governing the use of health savings accounts. Beginning in 2011, tighter restrictions will be placed on what can be considered a qualified medical expense, including the disallowance of over-the-counter medicines. Distributions from these accounts for nonqualified expenses will face a 20% tax, up from the current 10%. The new legislation also imposes an annual $2,500 cap on employer sponsored flex account contributions, which had not previously been limited.
New taxes on companies in the health care field will help pay for health care, but at the same time drive up prices. A medical device excise tax of 2.3% will begin in 2013. Items that are directly purchased by consumers, such as eyeglasses, contact lenses, hearing aids, and diabetic testing supplies will be exempt. Manufacturers of brand name pharmaceuticals will pay a tax based on their market share percentage, for a total of $3 billion annually. Health insurance companies will also pay a tax based on their percentage of market share, in addition to facing lower limits for the amount of executive compensation which may be deducted, thus increasing their tax liability. All of these taxes will not directly affect individual income tax returns, but will increase the cost of health care and health insurance for all Americans.
Beginning in 2018, all employer sponsored healthcare plans that exceed $10,200 for individuals and $27,500 for couples will be subject to a whopping 40% tax. In 2010, most would consider this an expensive “Cadillac” plan, only provided to the highest paid employees, and they would be right. It is important to note, however, that the thresholds for this tax are indexed to the rate of inflation, rather than to the rate of medical cost increases. Because medical costs have historically increased at a rate that radically outpaces the rate of inflation, the average cost of a health insurance policy will rapidly approach this threshold, imposing this tax on a greater number of health insurance plans each year.
The “Cadillac tax”, which is to be paid by health insurance companies, not consumers, is designed to make premium health insurance plans outrageously expensive. Employers would then have greater incentive to increase workers’ real wages, rather than offer better health benefits. Whether the “Cadillac tax” accomplishes this objective remains to be seen, it may simply cause the cost of all health insurance plans to rise.
Also enacted to raise revenue to pay for health care is a 10% tax on indoor tanning, effective July 1, 2010. This tax is projected to raise $2.7 billion over the next ten years. While this is just a fraction of the healthcare overhaul’s nearly $1 trillion price tag, the indoor tanning tax’s attempt to discourage a potentially cancer-causing activity cannot be overlooked.
The new legislation also imposes an individual mandate, which requires that all Americans (with a few exceptions) purchase “acceptable” health insurance, or pay a penalty. This fine will begin at $95 in 2014, and will increase to the greater of 2.5% of adjusted gross income or $695 by 2016. For those with incomes up to 400% of the federal poverty level (about $43,000 for a single individual or $88,000 for a family of four), subsidies will be available to assist in purchasing health insurance.
The IRS will be responsible for policing the payment of these new taxes, and plans to add an additional 17,000 agents in the coming years to handle this increased volume. The payment of penalties for failure to purchase health insurance will be enforced by the IRS, who will be authorized to withdraw these funds from individuals’ bank accounts if taxpayers fail to pay applicable penalties.
Love them or hate them, America’s new health care reforms are here to stay, and the bills to pay for them will come due shortly. This has been a widely debated, highly emotional issue, and therefore subject to manipulation of facts to support the opinions of those reporting on it. Hopefully this no-nonsense presentation of the upcoming changes to the tax law will allow you to adequately prepare for those that will affect you in the not-too-distant future.
