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Tax Highlights Of The Patient Protection And Affordable Care Act

Tax Highlights Of The Patient Protection And Affordable Care Act

With the fervor having subsided and the rhetoric a thing of the past it’s a good time to take a look at the specific provisions of Obama’s health care legislation. Here’s a rundown:


  • An “eligible small employer” may claim a tax credit for premiums paid toward health care coverage for its employees beginning in 2010. The credit is available through and including 2013.
  • The adoption tax credit increases to $13,170 and becomes refundable (meaning a $0 taxpayer can receive a refund). The adoption assistance exclusion increases by $1,000 for 2010 and 2011.
  • Children who have not reached age 27 as of the end of the tax year qualify for the general exclusion for health insurance beginning in 2010. The coverage applies to children of employees or self-employed individuals.
  • A health insurance premium assistance credit for taxpayers with household incomes between 100% and 400% of the federal poverty line is available beginning in 2014. The credit is refundable so like the adoption credit a $0 taxpayer can receive a refund.


  • Businesses that pay $600 or more in any year to providers of property and services will be required beginning in 2010 to file an information report with the IRS.
  • Penalties for underpayment of taxes arising from transactions lacking economic substance will be assessed at 20% (disclosed transactions) and 40% (undisclosed transactions) beginning in 2010. In determining whether a transaction has economic substance Treasury/IRS looks for a meaningful change in the taxpayer’s economic position other than a change in his/her tax liability.
  • Indoor tanning services will be subject to a 10% excise tax effective 7/1/10. The tax is assessed against the individual receiving the tanning services but collected and remitted by the person receiving payment for the services.
  • The penalty for non-qualified distributions from Health Savings Accounts and Archer Medical Savings Accounts increases to 20% beginning in 2011.
  • Flexible spending accounts and health savings accounts must use the definition of medical expense for itemized deduction purposes beginning in 2011. As a result OTC medications will no longer be available for reimbursement.
  • The Medicare tax on employees is increased by 0.9% on earned income in excess of $200,000/$250,000 for individuals and joint filers respectively beginning in 2013. This brings the rate up from 1.45% to 2.35%.
  • A new Medicare tax of 3.8% is introduced in 2013 for unearned income (e.g. investment income) for Adjusted Gross Income (“AGI”) exceeding $200,000/$250,000 for individuals and joint filers respectively.
  • Itemized medical expenses will need to exceed 10% of AGI (up from the current 7.5%) beginning in 2013. As the current Alternative Minimum Tax (“AMT”) threshold is 10% this change effectively removes the AMT adjustment. Taxpayers and their spouses age 65 and older will not be subject to the new 10% threshold until 2017.
  • Flexible spending accounts will be capped at $2,500/yr after 2013. The cap will be indexed for inflation.
  • A 40% surtax on high-cost health insurance (the so-called “Cadillac Health Plans”) will apply beginning in 2018. The standard for high-cost health insurance is an annual premium in excess of an inflation-adjusted $10,200/$27,500 for individual and family plans respectively.

The legislation is the boldest attempt at health care reform that we’ve seen in years. Its social aim is admirable. Unfortunately the massive expansion of Big Government does nothing to address the spiraling costs of health care and provides little incentive for behavioral changes that might have a positive impact on the physical health of Americans. Further it makes no attempt to curb entitlements – the unfunded liabilities that we “gift” to future generations.

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