The health care legislation that was enacted in two parts earlier this year impose on businesses a number of reporting requirements and potential tax penalties. The legislation will also impose significant new taxes on higher income individuals. The following chart summarizes the major tax provisions and the year in which each is effective:
|
Reporting of health insurance premiums paid by employer on employees’ W-2s |
2011 |
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1099 reporting for payments to corporations (currently exempt from such reporting) |
2012 |
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0.9% HI Tax on wages and/or self-employment earnings (see below) |
2013 |
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3.8% Unearned Income Medicare Contribution (see below) |
2013 |
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Limit on contributions to medical reimbursement cafeteria plans, etc., to $2,500 |
2013 |
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Penalties imposed on employers who do not provide adequate employer-paid health insurance |
2014 |
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Annual fee imposed on health insurance providers |
2014 |
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40% excise tax on “Cadillac” health insurance plans |
2018 |
The two largest revenue raisers (taxes) are the 0.9% HI Tax and the 3.8% Unearned Income Medicare Contribution. The following is a summary of these two new taxes, which take effect in 2014. Note that high-income taxpayers may well be subject to BOTH new taxes.
Additional Medicare Tax on high-income workers:
- 0.9% additional Medicare tax for employees, only if wages (or self-employment income) exceeds $200,000 (single) or $250,000 (married, filing joint)
- Is not an “above-the-line” deduction (like other self-employment tax)
- Employer withholds only on wages over $200,000
Examples:
John earns $240,000 and is single. He pays $360 additional tax.
$240,000-$200,000 = $40,000 x 0.9%
Jack earns $180,000 and Jill, his wife, earns $150,000. They pay $720 in tax.
$180,000+$150,000-$250,000 = $80,000 x 0.9%
If Jack and Jill were single, they’d pay NO additional tax.
Unearned Income Medicare Contribution:
- 3.8% surtax on lesser of “net investment income” or modified AGI in excess of $200,000 (single) or $250,000 (married, filing joint)
- “Net investment income” (NII) includes taxable interest, dividends, capital gains (other than on primary residences) and passive income; gains on sale of business-use property is not included.
- Applies to a trust starting at the highest trust tax bracket (currently $11,200)
Examples:
Jerry earns $180,000 and has $70,000 NII. His tax is $1,900.
$180,000+$70,000-$200,000 = $50,000 x 3.8%
Joe and Joan earn $130,000 each and have NII of $70,000. Their tax is $2,660.
$130,000+$130,000+$70,000-$250,000 = $80,000 but max is $70,000 x 3.8%
They would not owe any tax if they were single!
As with all taxes, there are a number of technical rules in applying these two new taxes. Assuming the law does not change between now and 2014, people can begin planning now for these future taxes. Aronson & Company has studied the Health Care Act as well as its tax implications and we will gladly discuss any current/future developments and planning ideas with you. Please note that the scenarios contained in this blog entry are merely examples and should not be relied upon without an independent, professional analysis of how the Health Care Act may apply to you.