Tax Effects of Obamacare

By Dale K. Geeslin, CPA, CFE

President Obama’s second term is expected to see the continuing implementation of the Patient Protection and Affordable Care Act (ACA). Many tax-related provisions in the ACA are scheduled to take effect in 2013 and beyond.

The ACA imposes a 3.8 percent Medicare contribution tax on the unearned income of higher-income individuals, estates and trusts effective January 1, 2013. The Medicare contribution tax applies to net investment income (NII) and to capital gains from the disposition of property. The Medicare contribution tax is not applicable to income derived from a trade or business, or from the sale of property used in a trade or business.

Higher-income taxpayers also are faced with a top rate on ordinary income of 39.6 percent and a 20 percent capital gains rate if the President follows through on his campaign promise to allow the Bush-era tax cuts to expire for these higher-income taxpayers. That creates an effective top rate of 43.4 percent on all NII-taxed income, except capital gains, which will be taxed at a 23.8 percent effective top rate.

The ACA also imposes an additional 0.9 percent Medicare tax on higher-income individuals, effective January 1, 2013. The additional Medicare tax applies to total wages, other compensation, and self-employment income that exceed the applicable threshold amount for the individual’s filing status.

For tax years beginning after December 31, 2012, the ACA increases the 7.5 percent threshold for itemizing medical expenses to 10 percent. However, the ACA temporarily exempts (through 2017) individuals age 65 and older from the 10 percent threshold.

Watch for additional information as Washington continues to negotiate.