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Tax Tip: Affordable Health Care and Taxes

Posted: Aug. 30, 2012, 7:00 p.m. EDT


By Mark E. Battersby

The U.S. Supreme Court has ruled and the “Affordable Care Act” (ACA) is now the law of the land—and a part of the Tax Code. Soon, every individual must have health insurance or face a tax penalty. Also, large businesses must offer their employees health insurance or face penalties.
 
Not quite hitting home as yet is the full impact the ACA’s 20-plus tax hikes will have not only on large businesses, but also on small retail businesses, business owners, those who are self-employed, and in fact, every individual. By ruling that the ACA is constitutional, the Supreme Court has actually approved a slew of tax hikes, some of them already in play.

Businesses with more than 50 employees will be required to provide employees with health insurance or face an “assessable payment” after Dec. 31, 2013. However, sizes matters. Already on the books, is the “Small Employer Health Insurance Tax Credit.” Employers with fewer than 25 employees can enjoy a tax credit, a direct reduction of the tax bill as opposed to a deduction that reduces the income upon which the tax bill is computed, of as much as 35 percent of the health insurance premiums they pay.

Understanding the Affordable Care Act
There are tax hikes for everybody. There is a Health Savings Account Withdrawal Penalty that involves the health savings accounts provided as an economic fringe benefit by so many small businesses, including a number of pet dealers. Since Jan. 1, 2011, any taxpayer under the age of 65 who withdraws money from health savings accounts for non-medical expenses faces a 20 percent penalty, up from 10 percent before.

The impact on the self-employed, sole-proprietors and others with no employees will be similar to the impact on individuals. For people in this group, the crux of the 2014 rollout is the “Individual Mandate Excise Tax” that requires all U.S. citizens and legal residents to have health coverage or pay a penalty. Starting in 2014, anyone not purchasing “qualifying” health insurance will be required to pay an income surtax that escalates from $95 for an individual to $325 in 2015 and $695 in 2016 and thereafter.

Fortunately, it is not all bad news. The ACA limits how much health insurance premiums can go up each year. Premiums for some may drop under the law compared with what they’re paying now. The law also eliminates the surcharges that insurers impose on employers whose employees have serious medical conditions. The state-operated exchanges are expected, when they begin business, to offer small businesses lower rates than insurance companies charge.

Because the law requires individuals to have health insurance, smaller businesses with fewer than 50 employees will soon be able to lure good workers away from larger companies. While there is the possibility that lawmakers will completely or partially repeal the ACA, planning to cope with the many tax hikes that have already occurred, as well as those scheduled to begin in the years ahead, is strongly advised.

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