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Tax Ramifications of Health Care Reform

The Supreme Court upheld President Obama's signature health care reform in a 5-4 decision on June 28, 2012. Beginning in 2014, uninsured individuals must buy health care coverage or else pay a tax penalty. Other previously enacted mandates will continue, such as free preventive care and coverage of adult dependents up to age 26, but at the expense of higher out-of-pocket costs. The Affordable Care Act has sweeping health care cost and coverage ramifications. The following list outlines some of the tax implications:

Medicare tax increase: A hospital insurance tax of 0.9% will be levied on high-income taxpayers ($250,000 married filing joint, or $200,000 single) effective after December 31, 2012.

Refundable tax credit: A form of assistance for individuals and families with the cost of premiums paid under a qualified health plan (through a state benefit exchange). Eligible individual's incomes must exceed 100% but not more than 400% of the poverty level. The Treasury Department is tasked with prescribing rules for calculating the poverty level. Dependents are not eligible, and if married, you must file jointly in order to qualify. This credit takes effect after December 31, 2013.

Small business tax credit: Small businesses (those businesses with 25 or fewer employees and average annual wages of $50,000 or less), have been and will continue to be eligible for a credit of up to 50% of non-elective contributions the business makes on behalf of the employee's health insurance premiums. This credit became effective in 2010.

Excise tax: This 2.3% tax on manufacturers, producers or importers on the sold price of a medical device is intended to help cover the cost of the legislation. The tax goes into effect after December 31, 2012.

Affordable choices of health benefit plans: Employers will be required to provide at least minimal benefits via a health plan to their employees. In order to pay for the requirements, the federal government will make payments to states to set up exchanges. The states must make payments to plans on behalf of individuals to defray the cost of the additional benefits. There will be a reporting requirement from the states to the Secretary of the Treasury.

Reduction in deductibles: Individuals with incomes between 100% and 400% of the poverty level will enjoy reductions to their out-of-pocket health-care expenses by two-thirds, one-half, or one-third, depending on their income. These tax breaks go into effect after December 31, 2013.

Small business requirement: The reform requires small business owners with more than 50 employees to provide health insurance or face an "assessable payment" equal to one-twelfth of $2,000 times the number of full-time employees. Employers must also file a return documenting whether or not they have complied. Small business must be in compliance or face the fine beginning after December 31, 2013.

Patient-centered outcomes research trust fund: This organization was created to review pharmaceutical medicines to determine if they have sufficient quality and are relevant to patients' needs. Funding for the organization will come from a $2 fee imposed on each health insurance policy or self-insured plan whose plan year ends after September 30, 2012. The fee is then multiplied by the average number of participants covered in the plan, and will extend to September 30, 2019.

Medical insurance deduction on individual taxes: The threshold for deducting medical expenses on a personal tax return will increase from 7.5% to 10% of your adjusted gross income beginning in 2013. In addition, Medicare Part D will be eliminated as an allowable medical expense.

Tax on Health Savings Account (HSA) distributions: Tax on distributions from Health Savings Accounts (HSA) and Archer Medical Savings Accounts for payment of unqualified medical expenses increased to 20%. This increase was effective in 2011. Tax on indoor tanning services: 10% tax on amounts paid for indoor tanning services. This tax was effective in 2010.

Excise taxes: According to a report generated by the Treasury Inspector General of Tax Administration (TIGTA), a "40% excise tax will be imposed on high-cost, employer-sponsored coverage if the value of coverage exceeds $10,200 (self-only) or $27,500 (not self-only)," to be paid by the coverage provider. This excise tax is effective after December 31, 2017.

Disclosure of information: Employers are required to disclose on each employee's annual W-2 form the value of the employee's health insurance coverage paid by the employer beginning in 2012.