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What is the PPACA Medicare tax increase?
Section 1411 of PPACA will impose an additional tax of 3.8% if certain conditions are met. Currently, individuals pay a Medicare tax of 2.9% of their wages. In addition to the current tax, the new tax expands the definition of income subject to Medicare taxes. The tax also applies to trusts and estates.
When does the tax become effective?
Begins after December 31, 2012
Who will be effected by this tax increase?
The tax will apply to single taxpayers gross income of $200,000 or higher and married taxpayers with a gross income of $250,000 or over. The tax also will apply to a married person filing separately whose gross income exceeds $125,000
How is the tax calculated?
The tax is calculated by multiplying 3.8% tax rate by the lower of either the net investment income for the year or the gross income over the threshold amount.
What is net investment income for the purpose of the new tax?
Items such as dividends, interest, capital gains, royalties, annuities, rents, and pass through income from a passive business (i.e. partnerships & S-corporations) are included. Items such as tax exempt nontaxable veteran’s benefits, municipal bond interest, capital gains excluded from the sale or a principal residence, distributions from IRAs, 403(b) plans, 401(k) plans, 457 plans, pensions, stock bonus plans, profit-sharing plans, or qualified annuity plans are not included in net investment income calculations.
What is modified adjusted gross income for the purpose of the tax?
The modified adjusted gross income includes wages, tips, salaries, other compensation, dividend and interest income, realized capital gains, business and form income, and income from other passive activities and the foreign earned income exclusion or foreign housing exclusion included.
What income is excluded from the new tax hike?
Income not subject to the modified adjusted gross income calculations includes income derived from: capital gains excluded from the sale of a principal residence, tax-exempt municipal bond interest, non-taxable veteran's benefits, and IRA, 403(b) plan, 401(k) plan, 457 plan, or pension distributions. Proceeds profit-sharing plans, stock bonus plans, or qualified annuity plans are also exempt.
Section II: Excise Tax on Comprehensive, High-Cost Health Insurance Plans
What is the new excise tax on comprehensive, high-cost insurance plans?
In an effort to penalize employers who offer excessively rich health benefit plans there is an excise tax on high-cost health plans referred to Cadillac health arrangements. This is a new non-deductible 40% excise tax that some experts have estimated will affect more than half of large employers’ active health plans by 2018.
The excise tax was included in PPACA to generate additional revenue
When does the excise tax become effective?
The tax becomes effective January 1, 2018.
How is the excise tax calculated?
The 40% nondeductible tax will be applied on employers and assessed against the annual value of any excess benefit provided under applicable employer-sponsored coverage. Excess benefit is defined as exceeding the aggregate of $10,200 for single coverage or $27,500 for family coverage in 2018. Those in high-risk professions and retirees are subject to higher thresholds.
What is excluded from the excise tax calculation?
Stand-alone dental and plan expenses are excluded from the calculation. Employers with a workforce of older or female workers who have higher-than-average health costs will be held to higher thresholds. Union plans are also exempt from the provisions of this tax.
How could this tax impact insurance premiums?
Employers subject to this tax in 2018 will either have premiums increased by the insurer on an insured health benefit plan or be subject to a surcharge applied by the administrator of a self-funded health benefit plan. Employers will be forced to either absorb the additional cost of the tax or pass the cost increase on to employees in the form of higher premiums or higher deductibles. Ultimately, the cost of this tax will likely be passed on to the employees covered by the plan.
What are the long term implications of this tax?
While the thresholds for this tax may seem to be avoidable for now, the longer term implications are heavy. A Study found that the average 2010 cost of medical coverage for non-retiree single coverage was $5,184 and a non-retiree family plan was $14,988. Using past levels of premium increases projected forward, the study estimates that many employer benefit plans will exceed the excise tax threshold.
How will PPACA change the way health saving accounts and similar financing arrangements operate?
PPACA establishes a new uniform standard for the preferred tax treatment of medicine and drug expenses for Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), Medical Savings Accounts (MSAs) and Health Reimbursement Arrangements (HRAs). Effective January 1, 2011, only prescribed medicines or drugs including over-the-counter medicines and drugs that are prescribed will be considered qualifying medical expenses. Over the counter drugs purchased without a prescription will no longer qualify for tax deffered, and these accounts will no longer pay for or reimburse the cost of these items. PPACA increases the penalty tax for using HSA and MSA funds for nonmedical purposes to 20% beginning in 2011. PPACA also limits annual FSA contributions for health care to $2,500.
What, if any, medical supplies are exempt from this provision?
Insulin purchased with or without a prescription still qualifies for the preferred tax treatment. These provisions do not apply to durable medical equipment or other non-drug medical items acquired over the counter such as crutches, bandages, tape, and diagnostic items such as glucose monitors.
What verification is required to preserve the preferred tax treatment?
Individuals seeking reimbursement from an employer sponsored HSA, MSA, FSA or HRA should submit a copy of the prescription along with the receipt showing the date and amount of the purchase with the request for reimbursement.
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