Five new tax increases take effect today to help pay for the nation’s health care overhaul.
The new measures are slated to raise $24.2 billion next year and more than $258 billion through 2019, according to the Joint Committee on Taxation.
Here’s a look at the changes:
CAP ON FSA CONTRIBUTIONS
An estimated 30 million American workers now place a portion of their pre-tax salary into health care flexible spending accounts offered by their employers. The accounts help pay for out-of-pocket medical costs such as co-pays and deductibles that aren’t covered by insurance.
The accounts require enrollees to decide in advance how much money they’ll contribute for the coming year. Most employers capped employee contributions at $5,000. But beginning in 2013, the Affordable Care Act will cap annual employee contributions at $2,500.
DEDUCTIONS FOR MEDICAL EXPENSES
Currently, taxpayers who itemize their returns can deduct the medical expenses from their taxable income that exceed 7.5 percent of their adjusted gross income. The health care act increases that threshold to 10 percent in 2013. The higher income threshold means many taxpayers with high medical bills will no longer qualify for the deduction. Seniors 65 and older and their spouses are exempt from the change until 2016.
MEDICARE HOSPITAL TAX HIKE
The Medicare Part A tax rate on wages – which pays for hospital, hospice, nursing home and home care services – will go from 1.45 percent to 2.35 percent for individuals with income above $200,000 and families with income above $250,000. Married couples who file separately and earn more than $125,000 are also subject to the tax hike.
INVESTMENT INCOME SURTAX
Tax rates on investment income will increase from 15 percent to 18.8 percent. The 3.8-percentage-point “unearned income Medicare contribution tax” applies to interest, dividends, capital gains, annuities, royalties and other types of investment income. But it only applies on investment income above the $200,000 and $250,000 thresholds.
MEDICAL DEVICE EXCISE TAX
The 2.3 percent excise tax on medical device sales will affect products, from artificial hips and bedpans to stents and defibrillators. The tax is a tradeoff of sorts for the device industry, which, like insurers and pharmaceutical companies, will see substantial new revenue when the health law requires millions of people to start buying insurance in 2014.
But industry officials say the new tax will hurt job creation and investment. Others aren’t so sure because the excise tax can be deducted from a company’s income taxes. One expert said that will make the true impact of the tax more like 1.4 percent instead of 2.3 percent. A research and development tax credit of nearly 2 percent further eases the tax burden on device companies.
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