Wealthy investors, health insurance companies and medical device makers will face hundreds of billions of dollars in new taxes stemming from the health-care law that the U.S. Supreme Court upheld today.
Some of the largest levies and fees in the 2010 law take effect in 2013. In all, the law is projected to raise an estimated $813 billion in revenue over 10 years to help pay for the expansion of insurance coverage, according to the Congressional Budget Office. That figure includes penalties under the individual mandate, which the court ruled is constitutional under Congress’ taxing power.
The court’s decision will prompt high-income taxpayers to begin more intense planning to minimize the effect of higher taxes on capital gains and dividends that begin next year.
“In this whole uncertain environment, it’s one piece of the puzzle where we’ll start to get some clarity” around taxes for individuals and companies, said Edward Karl, vice president of taxation for the American Institute of Certified Public Accountants in Washington. “We can start to remove some of the clouds that are following us around this year.”
The health-care law also included hundreds of billions of dollars in tax cuts. Small businesses are eligible for tax credits toward insurance premiums and the subsidies to middle- income families that begin in 2014 are structured as tax credits, which are paid directly to insurance companies.
The most significant taxes for individuals in the Patient Protection and Affordable Care Act are scheduled to take effect at the beginning of 2013. Married couples earning more than $250,000 a year and individuals earning at least $200,000 face a 3.8 percent tax on their “unearned income,” including capital gains, dividends and private-equity managers’ profits on leveraged buyouts.
Those high earners would be subject to an additional 0.9 percent levy on their wages exceeding those income thresholds starting next year.
An estimated 4.1 million households, or 2.4 percent of Americans, would pay one or both taxes, according to the Tax Policy Center, a nonpartisan research group in Washington.
The two taxes on high earners would raise $317.7 billion over the next 10 years, according to a new estimate from the congressional Joint Committee on Taxation. The House Ways and Means Committee released the estimate today, which says the taxes -- excluding the mandate penalties and several other provisions -- will raise $675.3 billion.
“The 3.8 percent Medicare tax is a big deal” for wealthy investors because of the variety of unearned income it covers, said Elizabeth Kessenides, a tax attorney in New York who represents people in financial services including private-equity and hedge-fund managers. “For private-equity fund managers, it was a significant item due to its potential application to the carried interest.”
The share of profits private-equity managers receive from investments is known as carried interest. It is often taxed as capital gains, which carry a lower rate than ordinary income and would fall under the new Medicare levy, Kessenides said.
“It could have some people triggering capital gains that they were thinking about doing next year,” said Tim Steffen, director of financial planning at Robert W. Baird & Co. based in Milwaukee. “That’s the most obvious repercussion.”
High-income taxpayers considering large transactions with capital gains such as selling a business or a second home have more reason to close deals this year with the 3.8 percent tax set for 2013, said Elda Di Re, partner and area leader of the personal-financial services tax division at Ernst & Young in New York.
High earners may accelerate income from stock options or bonuses into this year to avoid the additional 0.9 percent tax on their wages exceeding the thresholds scheduled for 2013, Steffen said.
Sue Stevens, chief executive officer of Stevens Wealth Management based in Deerfield, Illinois, said she may seek ways to keep clients below the $200,000 or $250,000 thresholds by staggering the taxable income they receive over several years if possible.
Wealthy investors also may buy municipal bonds because income from them is exempt from the 3.8 percent levy on unearned income, said Tim Speiss, chairman of the personal wealth advisers practice at EisnerAmper LLP, an accounting and advisory firm in New York.
The effect of the levies in the health-care law will have greater consequences for wealthy taxpayers if tax cuts first enacted during the presidency of George W. Bush expire as scheduled at the end of 2012. Unless Congress acts, the top rate on long-term capital gains and dividends, now 15 percent, would increase to 20 percent and 39.6 percent, respectively. For high earners who exceed the threshold, the health-care tax would bring the levy on dividends to as much as 43.4 percent.
Investors shouldn’t overreact to the Supreme Court decision as they have several months to make investment decisions and consider market performance, Steffen said. The results of the presidential election in November also may change tax policy, he said.
Republicans in Congress already have voted to overturn the law and plan another House vote on repeal on July 11, according to the chamber’s majority leader, Virginia Republican Eric Cantor. Democrats control the Senate, and President Barack Obama would have the ability to veto such a bill.
“Today’s decision does nothing to diminish the fact that Obamacare’s mandates, tax hikes, and Medicare cuts should be repealed and replaced with common sense reforms that lower costs and that the American people actually want,” Senate Minority Leader Mitch McConnell, a Kentucky Republican, said in a statement.
The health-care taxes in the law also included industry fees for pharmaceutical makers and health insurers, plus a 2.3 percent excise tax on medical devices that aren’t sold directly to consumers, such as hip implants and cardiac stents.
The House of Representatives voted 270-146 on June 7 to repeal the medical device tax, which is scheduled to take effect in 2013. Combined, those three industry fees and taxes are expected to generate $165 billion, according to the new estimate.
“Today’s decision adds new urgency to repealing the medical- device tax so that patients and providers can continue to expect innovative devices and technologies,” Mark Leahey, president and chief executive officer of the Medical Device Manufacturers Association, said in a statement.
For individuals, the law also places caps on the amount of pretax money that can be diverted to flexible-spending arrangements offered by employers to pay some health-care costs. It required people to obtain prescriptions to use pre-tax dollars in FSAs and so-called health savings accounts for over- the-counter medication. It also made it more difficult for people to take itemized deductions for their medical expenses.
One of the most controversial elements of the law among Democrats was a 40 percent excise tax on what some lawmakers called “Cadillac,” or high-cost, health-care plans. While that tax isn’t scheduled to take effect until 2018, many employers with generous benefits have made adjustments to avoid the levy.
According to the new estimate, that tax will raise $111 billion over the next 10 years.
Such adjustments by companies include offering high- deductible insurance with savings accounts, adopting wellness incentives for employees and increasing the amount that workers pay for medical expenses, said Steven Wojcik, vice president of public policy for the Washington-based National Business Group on Health, which represents mostly large employers.
The Supreme Court decision has “cleared up some of the cloud of uncertainty hanging over the law and employers should go forward preparing for the upcoming provisions that are going to affect employer plans,” Wojcik said.
Annual premiums for employer-sponsored family health coverage increased to $15,073 in 2011, up 9 percent from the prior year, according to a report by the Kaiser Family Foundation based in Menlo Park, California. Workers pay on average $4,129 and employers pay $10,944, the study said.
The health-care law also included a 10 percent excise tax on indoor tanning, stopped paper companies from receiving certain tax breaks for making a byproduct called “black liquor” and codified a judicial doctrine against tax shelters.