Tax Implications of the Health Care Law You Should Know About

Health care reform, despite the term, includes more than just a reform in how health care is managed in the United States. Health care reform includes new taxes, increases to existing taxes, expands IRS authority, and tax breaks for businesses and individuals who qualify.

The health care reform bill comes in two different parts, each having tax implications.  The first is the Patient Protection and Affordability Act  and the second is Health Care and Education Affordability Reconciliation Act of 2010.

The Cost

The health care reform legislation is expected to cost $950 billion dollars over a ten year time frame, according to the Congressional Budget reports. The bill is designed so that changes will happen gradually, allowing people to get used to complying with these new regulations.  It is important to understand the components of the health care reform legislation and how it applies to you as a taxpayer.

The Changes You Should Expect

The year 2010 will start the first roll out of changes in health care reform. Tax credits changes and alterations to medical accounts will be implemented first. While the changes in 2010 through 2013 appear to be minor, the major implications, specific to health care are expected to begin in 2014.

2010 Changes

• Prescription drugs will be rebated up to $250.00 to assist people on Medicare to afford the increasing cost of medications.  It is expected that the entire coverage gap will be eliminated over the next four years.
• Beginning in July 2010 there will be a 10% tax on indoor tanning services.
• There has been a revision to the adoption tax credit that will be retroactive back to January 1st of 2010. The maximum credit has been increased to $13,170.

2011 Changes

• There are more stringent fines for using a Health Savings Account (HAS) to purchase unapproved products. The fines will be raised to up to 20% for misuse of this account.
• Medical accounts such as flexible spending plans will no longer consider over the counter medications as allowable expenses.

2013 Changes

• Joint filers with incomes over $250,000 and single filers over $200,000 will now be subject to two taxes.  Medicare taxes on earned and investment income will be imposed.  Earned income will be taxed at a rate of 2.35%.  Investment income that includes, but is not limited to; interest, capital gains and royalty income will be taxed at a rate of 3.8%.  Although the tax brackets for incomes directly affected by the new tax are outlined by the new law, all taxpayers may be subject to certain tax increases.
• Caps will be imposed on contributions to flexible spending accounts (FSA).  A cap of $2,500 will go into effect; anything exceeding that amount will be included as taxable income.
• Medical deduction limits have increased to 10%. Tax filers under the age of 65 who have medical expenses that exceed 10% of their yearly earned income can deduct these at the end of the year. For people over 65 this change will begin in 2016.

2014 Changes

• All Americans with exception of Native Americans, prisoners and illegal immigrants will be required by law to have a health care plan and report the estimated cost of this on their yearly tax return.  This plan can be employer sponsored, government sponsored such as Medicare or Medicaid or an independently purchased plan.
• Large companies that do not provide employees with the option for a health care packaged will be faced with an additional $2,000 tax.
• Those that cannot afford health coverage may be eligible for tax credits based on their earnings and the current federal poverty level.
• The IRS will monitor through tax returns individual compliance with the new health care law by asking you to note the estimated value of your current health plan on your return.  If you do not comply with the law you will be responsible for paying a penalty. The penalty will begin at $95.00 and will increase to $695.00. Penalties will rise until the time you comply with the law.

The Future

The changes imposed by the health care reform legislation reach far beyond the year 2014.  Although the details are vague on the years following 2014, it is expected that taxes for businesses and the income of high earners will be subject to increased taxes. Because the changes are slow and gradual it is essential to remain up to date with the changes to the law as each step of the reform legislation rolls out.