The tax man is coming in 2013. And he’s wearing surgical scrubs and has a stethoscope around his neck.
Five new tax increases take effect on Jan. 1 to help pay for the nation’s health care overhaul.
New provisions of the Affordable Care Act require affluent taxpayers to pay more for Medicare and, for the first time, have their investment income subject to Medicare taxes as well. Also, people who use flexible spending accounts for health care expenses will pay higher taxes. And taxpayers who spend a lot out of pocket on their health care will find it harder to deduct those expenses from their taxable income, raising their tax bill.
Individual consumers won’t be the only ones paying higher taxes. Importers and manufacturers of certain medical devices will face a 2.3 percent excise tax on U.S. sales in 2013.
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The new measures are slated to raise $24.2 billion next year and more than $258 billion through the year 2019, according to the Joint Committee on Taxation.
Here’s a quick look at the changes:
CAP ON FSA CONTRIBUTIONS
An estimated 30 million American workers now place a portion of their pre-tax salary into health care Flexible Spending Accounts offered by their employers. The accounts help pay for out-of-pocket medical costs such as co-pays and deductibles that aren’t covered by insurance.
The accounts require enrollees to decide in advance how much money they’ll contribute for the coming year. Most employers capped employee contributions at $5,000. But beginning in 2013, the Affordable Care Act will cap annual employee contributions at $2,500.
The change will raise $1.5 billion in additional tax revenue in 2013 and $13 billion through 2019.
DEDUCTIONS FOR MEDICAL EXPENSES
Currently, taxpayers who itemize their returns can deduct the medical expenses from their taxable income that exceed 7.5 percent of their adjusted gross income. Obamacare increases that threshold to 10 percent in 2013. The higher income threshold means many taxpayers with high medical bills will no longer qualify for the deduction. Seniors age 65 and over and their spouses are exempt from the change until 2016.
The new higher rate will net $400 million in tax revenue in 2013 and $15.2 billion by 2019.
MEDICARE HOSPITAL TAX HIKE
The Medicare Part A tax rate on wages – which pays for hospital, hospice, nursing home and home care services – will go from 1.45 percent to 2.35 percent for individuals with income above $200,000 and families with income above $250,000. Married couples who file separately and earn more than $125,000 are also subject to the tax hike.
INVESTMENT INCOME SURTAX
Tax rates on investment income will increase from the current 15 percent to 18.8 percent. The 3.8 percentage point “unearned income Medicare contribution tax” applies to interest, dividends, capital gains, annuities, royalties and other types of investment income. But it only applies on investment income above the $200,000 and $250,000 threshold.
Collectively, the Medicare Part A tax hike and the investment income surtax will bring in $20.5 billion next year and $210.2 billion through 2019, according to government estimates.
MEDICAL DEVICE EXCISE TAX
The 2.3 percent excise tax on medical device sales will affect a range of products, from artificial hips and bedpans to stents and defibrillators. The tax is a tradeoff of sorts for the device industry, which, like insurers and pharmaceutical companies, will see substantial new revenue when Obamacare requires millions of people to start buying insurance in 2014.
But industry officials say the new tax will hurt job creation and investment. Others aren’t so sure because the excise tax can be deducted from a company’s income taxes. One expert said that will make the true impact of the tax more like 1.4 percent instead of 2.3 percent. A research and development tax credit of nearly 2 percent further eases the tax burden on device companies.
Government estimates project the device tax will net $1.8 billion in 2013 and an estimated $20 billion through 2019.