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The Many Ways We Will Pay For Health Care Reform

The Patient Protection and Affordable Care Act (also known as Obamacare) isn’t going to be free.  And while health care reform won’t take effect until 2014…we won’t have to wait that long to start paying for it.  And we will be paying the tab through a wide assortment of tax increases.

The biggest increase is a 3.8% surtax on investment income starting next year…being called the ‘unearned income Medicare tax’.  ‘Unearned income’ includes dividends, rental income, interest, short and long-term capital gains and passive income.  And the problem is that this tax is compounded by hikes that are already set for January 1st of next year as the Bush tax cuts expire.  When you add it all together, the capital gains rate (which was already rising from 15 to 20%) hits 23.8%…that amounts to a 59% jump in the rate.  And the dividend rate (which is already set to jump from 15 to 39.6%) will reach 43.4%.  The additional tax will apply to individuals earning more than $200,000 or couples earning more than $250,000.


Also starting next year, we will see a .9% surtax on Medicare payroll taxes for incomes over $200,000 ($250,000 if married).  You and your employer are already paying 1.45%…which comes to a 2.9% tax (if you are self-employed you pay the entire 2.9%).  Your portion will increase to 2.35%…which means the tax will add up to 3.8%.


There are also ways taxpayers will be hit regardless of how much they make.

Starting next year, there will be a cap on pre-tax contributions to your Flexible Spending Account.  There is no tax related limit on how much you put aside for medical expenses today…next year contributions will be capped at $2,500.

And next year, medical device manufacturers will have to pay a 2.3% excise tax on devices that retail for over $100.  That includes everything from MRI machines to stethoscopes…and it’s not a stretch to say this could increase the cost of procedures for doctors and patients.

Also starting next year, the itemized deduction for medical expenses will increase from 7.5% of adjusted gross income to 10%…a significantly higher hurdle.

Starting in 2014, a penalty tax will be phased in for individuals who choose not to purchase health insurance, ranging from $695 to $4,700, depending on your income.

Also starting in 2014, if an employer with 50 or more full-time employees does not offer minimum health coverage, and even one of the employees is receiving insurance subsidies, they will pay a penalty of $2,000 per subsidized employee (and then for all employees after the first 30).

Starting in 2018, there will be a 40% tax on “Cadillac” health care plans.  If you have a comprehensive health care plan, and your employer pays for all or most of it, you will have to pay a 40% tax on the amount your employer pays.

Some have called Obamacare the ‘largest tax increase in the history of the world’.  That’s an exaggeration…but it is our tenth largest increase as a percentage of economic growth.

Health care reform is going to be pricey for taxpayers…and for the IRS, which will be left to shoulder the enforcement of new rules.  And that will be easier said than done.  The IRS is going to have to enforce 47 tax provisions under Obamacare.  And that will cost something like $881 million in 2013.  But considering that lawmakers have reduced the IRS’s budget for the past two years, and considering that its enforcement staff was reduced by 3,000 this year…it remains to be seen whether its up to the task.

Obamacare will raise over $500 billion in taxes in its first 10 years, and those increases are both progressive (impacting taxpayers with higher incomes) and regressive (impacting taxpayers with lower incomes).  Basically no taxpayer will be left unscathed.  And it stings more when piled on top of the “Taxmageddon” that is coming in January.

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