Taxes and the Affordable Care Act

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Taxes and the Affordable Care Act

1 Adult

2 Adults

3+ Adults

2014

1% AGI/$95

1% AGI/$190

1% AGI/$285

2015

2% AGI/$325

2% AGI/$650

2% AGI/$975

2016 +

2.5% AGI/$695

2.5% AGI/$1,390

2.5% AGI/$2,085

None

The individual mandate’s tax penalties collected $4 billion for the government in 2018, the last year it was in place.

Employers with 50 or more workers risked a $2,000 (non-deductible and inflation-indexed) fine per full-time employee for failing to provide health insurance. This price has continuously increased since 2015, and it presently stands at $2,700 for 2021. This is referred to as the employer’s shared responsibility payment.

The Tax Cuts and Jobs Act, passed in December 2017, contains a permanent repeal of the Affordable Care Act’s individual mandate provision beginning with the 2019 tax year.

Additional Repeals of ACA Taxes

The Cadillac tax, the medical device tax, and health insurer surcharges were all abolished as part of the Further Consolidated Appropriations Act, a short-term continuing funding measure approved in December 2019.

These important taxes collected large revenues, much more than the individual mandate fines, allowing the government to offset some of the higher expenditures incurred as a result of the ACA. This is where these things stand in 2021.

Cadillac Tax

The Cadillac tax was a 40% levy on employer-provided health insurance beyond specified levels. The Cadillac tax affected high-end premium health insurance plans that were at or above the 85th percentile of health insurance benefits (roughly $11,200 for individual coverage or $30,100 for family coverage).

The charge was designed to dissuade those with comprehensive health insurance from using medical treatments that were unneeded or inappropriate. Unsurprisingly, it was not well received by big businesses, patient advocates, labor organizations, or healthcare providers, many of whom formed the Alliance to Fight the 40.

The Joint Committee on Taxation predicted that abolishing the Cadillac tax will cost the government $197 billion in revenue over the following ten years.

  Schedule K-1: Beneficiary's Income, Deductions, Credits

The tax was postponed twice until it was abolished. The Cadillac tax was postponed from 2018 to 2020 by Congress in 2015. It was postponed again in 2018 until 2022. It was formally discontinued as of the 2020 tax year in December 2019.

Health Insurer Fees

Because the sector benefited from more clients as a consequence of a bigger fraction of the population obtaining health insurance coverage, health insurance providers were first paid an annual premium. The yearly charge and medical device tax were enacted to assist in defraying the costs of the ACA’s increased health insurance coverage.

The charge levied by health insurers on insured medical, dental, and vision coverage. It was based on a health insurer’s industry market share. It went into force in 2014 but was stopped for 2017 and 2019, while it remained in place for the 2018 calendar year. It was also in effect for the 2020 calendar year, however it was abolished in 2021.

Medical Device Tax

The medical device tax fails to reduce consumer healthcare expenses while increasing expenditures and responsibilities on the healthcare system as a whole. The medical device tax was a 2.3% excise tax levied on the purchase price of medical equipment in the United States. There was bipartisan support for permanently removing the medical device tax.

The effect on the medical equipment business was significant. Between 2013 and 2015, the medical device sector lost 29,000 jobs, 22,000 of which were attributed completely to the tax. Medical device businesses postponed R&D spending—85% of companies in the sector said they would resume previously postponed R&D expenditures if the tax was permanently eliminated.

It was in force from 2013 to 2015, but was suspended by Congress from 2016 to 2019, before being permanently removed in 2020. According to the Joint Committee on Taxation, removing the medical device tax and health insurance surcharges would cost the government $151 billion over the next ten years.

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In the Further Consolidated Appropriations Act, Congress abolished three major ACA taxes in December 2019: the Cadillac tax, the health insurer charge, and the medical device tax. Other sections were abolished in the 2017 Tax Cuts and Jobs Act and the 2020 CARES Act.

ACA Taxes That Survived

Medical Deduction Threshold Tax

The ACA imposed a $15 billion penalty on those who claim a deduction for having high medical expenditures. From 2013 to 2016, the former threshold of deductible medical costs exceeding 7.5% of AGI was replaced by a 10% barrier. This increased requirement did not apply to Americans aged 65 and over. For tax years 2017 and 2018, the Tax Cuts and Jobs Act reintroduced the previous 7.5% AGI level. In December 2019, the Further Consolidated Appropriations Act extended the lower 7.5% AGI threshold for tax years 2019 and 2020.

Health Savings Accounts Caps

The ACA established an annual contribution maximum for health savings accounts, which is $3,600 (rising to $3,650 in 2022) for individual coverage and $7,200 ($7,300 in 2022) for family coverage for the 2021 tax year. Flexible spending accounts (FSAs) have a $2,750 maximum for the 2021 tax year and a $2,850 limit for 2022.

Medicine Cabinet Tax

The medicine cabinet tax, a $5 billion ACA levy, also said that U.S. consumers may not use HSAs, FSAs, or health reimbursement pretax monies to purchase nonprescription, over-the-counter drugs. As part of the CARES Act, this provision was permanently eliminated beginning with the 2020 tax year. Certain OTC drugs and supplies, as well as feminine care items, are now HSA and FSA eligible without a prescription.

Indoor Tanning Tax

This tax, which went into effect in July 2010, imposed a 10% excise tax on indoor tanning clinics in the United States. While it was intended to generate $1 billion in additional tax revenue over the first four years, the tax has subsequently been declared a failure, collecting just over $367 million. It also led to the downfall of the indoor tanning parlor sector, which supporters of the provision continue to see as a public health victory. As of 2021, the tax is still in force.

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Medicare Tax

The 0.9% Medicare surtax on salaries and self-employment income beyond $200,000 for individuals and $250,000 for married couples stays untouched by later suspensions and repeals, since repealing an extra tax on high earnings that finances Medicare would be controversial.

Net Investment Income Tax

The 3.8% ACA tax on net investment income applies to unincorporated taxpayers (mostly individuals, estates, and some trusts) with modified adjusted gross income (MAGI) in excess of the following yearly income levels:

  • $250,000 for married taxpayers filing jointly or for a surviving spouse
  • $125,000 for a married taxpayer filing separately
  • A qualified widow(er) with a dependent child is eligible for $250,000 in benefits.
  • Everyone else gets $200,000, except estates and trusts, where the threshold is equal to the greatest sum at which the maximum tax rate kicks in.

These rates are not inflation-indexed. As of 2021, the tax is still in force.

The Bottom Line

People may not know it, but a wealth of taxes that resulted from the ACA’s implementation has drastically affected the financial life of many Americans. As long as the ACA is in effect, be sure to contact a tax expert to limit any financial impact.

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