Tax Effects of the Patient Protection and Affordable Care Act

As a result of the recent Supreme Court ruling to uphold the constitutionality of the Patient Protection and Affordable Care Act (PPACA), there will be some tax effects for workers and recipients of investment income.

Beginning in 2013, an additional 0.9% in Medicare taxes are assessed on wages in excess of $200,000 for single filers, and $250,000 for married, filing jointly, or $125,000 each when married and filing separately.

Further, a new 3.8% Medicare tax is imposed on Net Investment Income for all taxpayers whose “adjusted gross income” exceeds the benchmarks stated above.

Additionally, taxpayers will lose some deductions, which is a form of increased income tax to be paid. The itemized deduction threshold for medical expenses will increase from 7.5% of adjusted gross income to 10% of adjusted gross income. This means fewer medical deductions will be allowed to some taxpayers, resulting in an increase in tax.

There will also be changes in the amount of contribution a taxpayer may contribute to a Flexible Spending Account. The amount that an employee can contribute will be reduced from $5,000 per year to $2,500 per year, with the result that medical expenses that would otherwise be paid from a Flexible Spending Account financed by the employee with pretax dollars in excess of $2,500, but less than $5,000, will no longer be deductible.

Beginning in 2014, most individuals must obtain “qualifying health insurance” coverage, either from their employer or on their own, or be subject to an imposed penalty in the nature of additional tax for failing to obtain qualifying health insurance.

Employers with employees in excess of an average of 50 full-time employees during the preceding calendar year must offer health insurance coverage for all full-time employees or become subject to an excise tax based on the number of its full time employees in excess of 30. The new PPACA requires that the employer offer a statutorily defined minimum level of health insurance coverage.