Like them or not, here are five taxes that will go into effect Jan. 1 because of the Affordable Care Act, or Obamacare. Whether you’re for or against the act, you should know about the most important tax increases coming in less than two weeks as a result of this legislation.
1. Surtax on investment income — a $123 billion tax increase. This is a new 3.8 percent surtax of investment income earned in households making at least $250,000, or $200,000 for a single filer. This applies to many real estate transactions as well as the sales of investments, like stocks, bonds, mutual funds, and the like. If you’re not sure whether it will apply in your particular circumstance, you’re not alone. Tax professionals are also waiting to hear through rulings from the IRS as to how to apply this complicated new tax.
2. The medical device tax — a $20 billion tax increase. Medical device manufacturers have 409,000 employees in 12,000 plants across the country. The Affordable Care Act imposes a new 2.3 percent excise tax on gross sales, even if a company doesn’t earn a profit in a given year. In addition to killing small business jobs and impacting research and development budgets, this will increase the cost of healthcare by making everything from pacemakers to prosthetics more expensive.
3. The “haircut” for medical itemized deductions — a $15.2 billion increase. Right now, those Americans facing high medical expenses are allowed a deduction to the extent that those expenses exceed 7.5 percent of adjusted gross income. This “haircut” (tax increase) imposes a threshold of 10 percent of adjusted gross income. The limiting of this deduction mostly harms near-retirees and those with modest incomes with high medical bills, by widening the net of taxable income on the sickest Americans.
4. The “Special Needs Kids” tax — a $13 billion tax increase. The 30 million to 35 million Americans who use a Flexible Spending Account (FSA) at work to pay for their family’s basic medical needs will face a new government cap of $2,500 (currently there is no federal limit on the accounts, although employers are allowed to set a cap).
The one group of FSA owners for whom this cap is particularly cruel are parents of the millions of special needs kids who use FSAs to pay for their education needs. Tuition rates for these schools are usually expensive. In Washington, D.C., for example, the National Child Research Center reports tuition rates for these schools can easily exceed $14,000 a year. Under current tax rules, FSA money can be used to pay for this type of special needs education. The Affordable Care Act tax provision will limit the options available for these families.
5. Medicare payroll tax hike — a $86.8 billion tax increase. The current Medicare payroll tax is 2.9 percent on all wages and self-employment profits. With this new tax increase, wages and profits exceeding $200,000 ($250,000 for married couples) will now be faced with a 3.8 percent tax rate instead. This is a direct marginal income tax hike on small business owners, who are liable for self-employment tax in most cases.
In addition to these five tax increases, another ramification of the Affordable Care Act is the fallout from the many large and small businesses that will either be laying off workers or reducing full-time employees to avoid the high penalties under the Affordable Care Act.
Among some of the nation’s companies that have announced plans to make adjustments are these:
• Welch Allyn, a manufacturer of medical diagnostic devices headquartered in the central New York town of Skaneateles, is laying off 275 workers over the next three years due to the new medical device tax.
• Dana Holding Corp., a supplier of axles, driveshafts, off-highway transmissions, sealing and thermal-management products, and service parts headquartered in in Maumee, Ohio, has warned its 21,500 employees of coming layoffs to help cover the $24 million it will need over the next six years for additional healthcare expenses.
• Stryker Corp., a medical device manufacturer based in Portage, Mich., is eliminating 1,250 jobs over the next year.
• Boston Scientific Corp., a developer, manufacturer and marketer of medical devices based near Boston, is cutting between 1,200 and 1,400 jobs while also shifting investments and workers to China.
• Medtronic Inc., based in Minneapolis and the world’s largest medical technology company, cut 500 jobs this year and will cut another 500 in 2013.
Contact Drew Blease, president and founder of Blease Financial Services, 7358 N. La Cholla Blvd., Suite 100, at email@example.com or (520) 299-7172.