ObamaCare or the Affordable Care Act (ACA) is a health care reform law that aims to make health care insurance affordable to Americans, enhance the quality of health insurance and health care. It was also enacted into law to minimize government expenses on health care.
Under Obamacare, several provisions are included such as giving subsidized health insurance coverage to individuals who earn less and belong to income earners with under 400% of the federal poverty level, mandating individuals to have minimum essential coverage annually except those with Medicaid, Medicare or are exempted for other reasons, giving tax credits to eligible individuals and penalizing those who fail to do so with the shared responsibility payment by way of paying the fee when the individual file for federal income tax the following year. In 2014, the tax was equivalent to 1% of the total income of the individual and for the year 2016, it will increase to 2.5%.
The increase in taxes, according to reports is already set up to 2016 and no changes are to be expected for now. However, these tax increases cover different aspects and can be confusing to some taxpayers, not to mention its impact to individuals and businesses.
Tax Related Changes Before and Since ObamaCare
1. Before the Affordable Care Act, deductions from medical expenses that can be claimed are equivalent to the excess of 7.5% of the individual’s AGI (Adjusted Gross Income). The lover the AGI, the more medical deductions can be claimed. After ObamaCare, it was increased to 10% of the AGI. But until 2017, it will still remain at 7.5% for individuals who are 65 years old or older by the end of the given year or whose spouses are also 65 years and above.
Adjusted Gross Income – this is the total income of an individual that is subject to income tax. Calculated income can come from being a salaried employee or self-employed. It also can be from alimony income or money coming from interest from bank accounts.
2. Prior to ObamaCare, the employee’s contribution to heath care flexible spending amount is deducted from his or her taxable income and the fund can be used by individual for reimbursement for medical expenses. Moreover, there is no cap on the contributions made annually under health care FSA. When Obamacare was enacted, contribution was limited to $2,500 although increases are allowed depending on the inflation rate.
ObamaCare Tax Increases
Although the average American earner will not be directly hit by these tax hikes, individuals who have higher income and businesses that make money will feel the impact of these new tax increases overall. Individuals earning more than $200,000 or those who have a household income of $250,000 will be affected as well as companies employing around 50 employees and earning $250,000.
Medicare Payroll Tax
Under ObamaCare, there was a 0.9% increase on medicare tax on income coming from employment or from being self-employed. Before, the 2.9% tax was imposed and divided between the employer and employee while a self-employed person will shoulder the whole 2.9%. With the tax hike, it became 3.8%. This is for a single individual earning over $200,000 or $250,000 for married individuals. Married individuals filing separately and earning over$125,000 and self-employed people will also have to pay the surtax.
Individual Mandate Excise Tax and Employer Mandate Excise Tax
ObamaCare mandates Americans to have health care coverage known and those companies with 50 employees and above to get health insurance for their employees. In 2014 and 2015, the surtax for an individual who fails to get coverage is 1% of AGI or $95, whichever is higher and 2% of AGI or $325, respectively. By 2016 and beyond, it will increase to 2.5% or $695. On the other hand, employers with over 50 full-time employees who fail to give health insurance coverage to them will have to pay their employees an extra $2,000 which is non-taxable. And if the employee paid on his own through any of the insurance exchanges, the non-taxable additional amount will be $3,000. Additionally, if coverage will be given but is offered 30-60 days after the employee’s entitlement to one, a tax of $400 for every employee will be imposed. And if the duration exceeds 60 days, the tax will be increased to $600.
Withdrawal from Health Savings Accounts (HSAs)
Taxpayers who make early withdrawals of their HSAs with non-medical reasons have to pay 20% for penalty and additional taxes. Before ObamaCare, individuals who want to use their HSA money for non-medical expenses only have to pay 10%.
Said to take effect in 2018, a permanent and non-deductible 40% tax will be imposed for Cadillac Health Insurance plans or expensive insurance coverage based on employment. This amount is 40% of the health care coverage that exceeds the threshold amount set. The said amount is $27,500 for coverage for the whole family and $10,200 for individual policyholders. By 2018, threshold amounts will also increase depending on the age and gender of the insured and the nature of the job of employees and the risks involved like for people in law enforcement and the construction business.
Taxes Imposed on Drug Companies and Medical Device Manufacturers
Entities related to the medical field like pharmaceutical and manufacturers of medical devices are also affected by the ObamaCare tax hike. Pharmaceutical companies will have to pay new excise tax for branded drugs. On the other hand, medical device manufacturers who profit are imposed 2.3% on excise taxes which started in 2013.
Medicine Cabinet Tax
This is the tax imposed on over-the-counter drugs, a matter opposed to by many politicians since it only gives the government $400 million in revenues, amount that they say is not justifiable enough considering its effect on consumers. The price of non-prescription drugs have increased since ObamaCare and this affected people who buy OTC drugs.
Since ObamaCare was signed into law, there have been about 20 tax reforms and hikes imposed by the government. Implementation dates might be varied with some already observed but definitely, all these changes in taxation will take place and come into full force sooner or later.