Now that the Supreme Court has upheld Obamacare and President Obama won re-election, it is certain that come January 1, 2013, many Americans will face new taxes. The press is focusing on one aspect of the new taxes that will help pay for Obamacare, the 3.8% investment tax. But there are many other changes to the tax code because of Obamacare that the press isn’t focusing on. I will do my best to keep things simple, which is hard because well, we’re talking about the tax code here!
New 3.8% Investment Tax
The 3.8% tax increase will be on investment income, which includes capital gains and dividends, for filers married filing jointly earning over $250,000 per year and for single filers earning over $200,000 per year.
Remember that is applies to investment income, not wages. So if you are a single filer that earns $300,000 but have no dividends or capital gains during the year, then the tax does not apply to you. However (and this is typical tax law), wages and Social Security can raise your adjusted gross income making you vulnerable to the tax.
For example, let us say that a married couple filing jointly has earnings of $230,000 plus $170,000 of investment income. While their investment income is below the $250,000 threshold, they still owe the 3.8% tax. Their adjusted gross income is $400,000 which is $150,000 above the threshold. This $150,000 is subject to the 3.8% tax which would be $5,700.
As another example, let us say that you are a single filer that has no wages, but you receive $30,000 in Social Security and have $100,000 in investment income. You do not owe the additional 3.8% tax because your adjusted gross income is less than the $200,000 threshold.
This 3.8% tax will be added to whatever tax rates are in 2013, given that the Bush tax cuts are set to expire at the end of 2012.
What is Investment Income?
Before diving into the other taxes that will come about from Obamacare, we need to define what is considered to be investment income. As it stands now, the definition of investment income includes:
- Short and long-term capital gains
- Interest (except municipal bond interest)
- Taxable portions of annuity payments
- Income from the gain of selling your house
- Net gain from selling a second house
- Passive income from real estate investments where the taxpayer does not actively participate
Note that the tax on the gain of the sale of your primary residence is only on the gain above what is in the books for excludable income. Currently these amounts are $250,000 for single filers and $500,000 for joint filers. This means that if you are single, you would only owe the 3.8% investment tax on gains greater than $250,000. For married filing jointly the tax only applies to gains greater than $500,000.
0.9% Medicare Surtax
The Medicare tax that is deducted from your paycheck will also increase for those married filing jointly whose earnings are $250,000 and higher and single filers whose earnings are $200,000 and higher. Currently, as an employee, you a pay 1.45% Medicare tax, regardless of your earnings. As of January 1, 2013, you will now pay 2.35% on earnings above $250,000 for joint filers and $200,000 for single filers.
For example, if you are married filing jointly and your earnings are $300,000, you will owe 1.45% on the entire amount, which is $4,350. You will then owe an additional 0.9% on the $50,000 above $250,000 which comes to $450.
If you are self-employed, there is no deduction allowable on this new tax, meaning you will be paying it.
Other New Taxes from Obamacare
As I mentioned before, there are many other new taxes or changes to current tax law to help pay for Obamacare. Everyone is subject to these taxes, regardless of your income. Here is a highlighted listing of some of the one’s I feel deserve the most attention.
- The Medicine Cabinet Tax: This tax went into effect in 2011 and excludes the reimbursement of over-the-counter medication expenses from your health savings account (HSA), flexible spending account (FSA) or health reimbursement account (HRA).
- There is also now a cap on the amount of money you can place into a flexible spending account (FSA). The new maximum amount you can contribute to your FSA in 2013 is $2,500. While this does not seem like a big deal, many families use the money in an FSA for their special-needs child to help cover the cost of education.
- In previous years, you could itemize your medical expenses if they exceeded 7.5% of adjusted gross income. They must now exceed 10% of your adjusted gross income if you want to itemize.
- The penalty on non-medical withdrawals from a health savings account will double from 10% to 20%.
- There will be a 2.3% tax on medical devices that cost more than $100 in 2013. While this 2.3% tax will be paid by medical device manufacturers, you can be certain that they will be passing on either a portion or all of the tax onto the purchaser of the device.
- Finally, there will be a “penalty” tax that will be phased into effect from 2014-2016 for those who choose not to have health insurance. The “penalty” will vary in size depending on your income, but current amounts start off at $695 a person up to $4,700 a person. Again, the size of the penalty you would pay depends on your income.
I hope this gives you a better idea of what is coming your way in regards to new taxes because of Obamacare. The premise of this post was to explain the tax side of the mandate. I am not trying to make this into a pro-Obamacare or anti-Obamacare post. I am simply writing about the new taxes many will experience. I wanted to do this because the media is solely focusing on the 3.8% tax that will hit certain income groups when there are many more aspects to new taxes that relate to Obamacare.
Readers, what are your thoughts on these new taxes? Do you see any that will impact you?