Robert Loe CPA

How much will healthcare cost you?

We’ve all heard a million different things about the enacted healthcare legislation.  With the current political state, the media has started to renewed its overwhelming coverage of the healthcare bill saga.  Along the way the issue has invoked a wide range of emotions, from fear to disgust and to outrage.

Whether you fought tooth and nail to stop it or welcomed it with open arms, the healthcare bill ultimately became our new healthcare laws. As it stands now though, the 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 rates.  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.

Taxpayers who claim out-of-pocket medical expenses as itemized deductions will be limited to those in excess of 10% of their AGI, but taxpayers over 65 years of age (and their spouses) will keep the 7.5% exclusion until the end of 2016. Starting January 1, 2017, all taxpayers may deduct only the amount of the total un-reimbursed allowable medical care expenses for the year that exceeds 10% of your adjusted gross income. Most people are rarely able to deduct any out-of-pocket medical expenses, simply because these costs don’t ever exceed 10% of their income.

Also affecting the deductibility of medical expenses are changes to the HSA limits set by the IRS.

Health Savings Account (HSA) – IRS Limits

2016 IRS Limits

Single Plan Family Plan
Maximum Contribution Limit $3,350 $6,750
Minimum Deductible $1,300 $2,600
Maximum
Out-of-Pocket
$6,550 $13,100
Catch-up Contribution (55+) $1,000 $1,000

2017 IRS Limits

Single Plan Family Plan
Maximum Contribution Limit $3,400 $6,750
Minimum Deductible $1,300 $2,600
Maximum
Out-of-Pocket
$6,550 $13,100
Catch-up Contribution (55+) $1,000 $1,000

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% applies for all years after 2012.  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.  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 2020, all employer sponsored healthcare plans that exceed $10,200 for individuals and $27,500 for couples will be subject to a whopping 40% tax. 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.  This tax was projected to raise $2.7 billion over the next ten years but has fallen significantly short of expectations. 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 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 is equal to 2.5% of adjusted gross income or $695 in 2016 and 2017.  For those with incomes at and below 400% of the federal poverty level (about $43,000 for a single individual or $88,000 for a family of four), will be granted subsidies 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 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.

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