The shutdown of the federal government pivots on which side will blink first — the president or House Republicans. It all comes down to whether or not there will be a willingness to delay the implementation of the Affordable Care Act, otherwise known as “Obamacare.”
Adopted nearly two and a half years ago, it was supposed to roll out this October with actual coverage to begin Jan. 1, 2014. We have already heard horror stories from those who have experienced software glitches during the sign-up process and from people who discover plan prices are currently unavailable. In other cases, some folks who already have insurance are learning their current plans are being canceled by insurance carriers and they’re being offered new plans with substantially higher premiums.
One thing we hear that causes much concern is the requirement that all individuals have health insurance or face penalties when filing their income tax returns. What is it and can the federal government really slap taxpayers with a penalty for not having health insurance?
Beginning in 2014, all individuals lawfully present in the U.S. must maintain a minimum amount of health insurance coverage. If they do not maintain that minimum, they must pay a $95 excise tax per adult, or 1 percent of income, whichever is greater. The tax would be half that amount for an uninsured, underinsured child up to a maximum of 300 percent of the adult tax per household. The penalty increases to $325, or 2 percent of income, per adult in 2015, $162.50 per dependent. In 2016, the penalty is $695, or 23.5 percent of income, per adult, and $347.50 per dependent. Noncompliance would be subject to criminal penalties. After 2016, the tax amount will be indexed for inflation.
Currently, unreimbursed medical expenses can be used as an itemized deduction on individual tax returns if the amount exceeds 10 percent of the taxpayer’s adjusted gross income. This is the deduction for medical expenses currently claimed on Schedule A of the return. For high income earners, there is an additional “hospital insurance tax” of 0.9 percent that will be tacked onto the current Medicare tax of 1.45 percent for a total of 2.35 percent on the employee while the employer’s portion will remain at 1.45 percent. The total contribution to Medicare will be 3.8 percent. The thresholds when the additional tax kicks in will be when wages are in excess of $250,000 for couples; $125,000 for married individuals filing separately, and $200,000 for individuals. It will also apply to the self-employed. The entire 3.8 percent rate will also apply to investment income such as capital gains, dividends and rent and royalty income when the thresholds are exceeded. The additional tax will apply beginning this year. While employers will not be liable for the additional tax if they fail to withhold it, they will be responsible for any penalties imposed for the failure to withhold the additional tax.
Although the IRS has issued guidance on the withholding of the additional Medicare tax — the employer is to start withholding the tax in the pay period when the employee’s compensation exceeds $200,000 — the additional withholding is applied to all income in excess of the threshold. This may be a challenge for an employer where the spouse works for another company or where a single individual may hold two jobs which, if combined, would put that employee over the threshold.
For those who have a flex plan that reimburses health care benefits, that reimbursement must not exceed $2,500 per year beginning with this year. Costs incurred for nonprescribed, over-the-counter medications are no longer eligible for reimbursement from a flex plan.
A new 2.3 percent tax on medical devices manufactured or imported starts this year. This is one of the major points of contention in the budget stalemate, as it is a new tax on medical devices that will raise the cost of health care.
An excise tax would be imposed on “Cadillac” health plans, valued in excess of $10,200 for individuals and $27,500 for families. The tax would be 40 percent of the plan’s value. The income thresholds would be indexed for inflation plus 1 percent. The tax takes effect in 2018. Surprisingly, many of the health care plans negotiated under collective bargaining contracts and those available to Hawaii workers could fall into this trap.
These are but some of the tax traps the Affordable Care Act has created and they are good reasons to stop and give pause.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.