Middle Class & The ObamaCare Taxes

The Obamacare mandate brings more than one kind of tax with it and it may actually affect the middle class. Before you read further, I would like to make it clear that my intention is not to take sides or bash Democrats or Republicans. I have done my earnest effort to have an independent take on what kind of taxes will come with Obamacare and how they will affect us.

The Investment Income Surtax

The investment income surtax will take effect on 1st January 2013 and will primarily affect the incomes above $200,000 (single) and $250,000 for joint filers. There will be 3.8% surtax on your investment income if your income falls within the specified limits.

How this may affect us? Since the income limits are above $200,000 individual and $250,000 joint, I don’t think this will directly impact the middle class. However, this can easily affect the home sales. If you sell your home and your profit is more than $250,000 (single) or more than $500,000 (married), the portion above $250,000 or $500,000 is considered as investment income. Earning the investment income combined with your regular gross income can trigger the investment income surtax.

Example: Suppose Jane and John sold a house for $600,000. They had originally bought this house for $55,000 ten years ago and hence their profit is $520,000. Since they are married and their profit is $545,000, the $45,000 above $500,000 is considered an investment income.

Now consider that Jane and John’s combined adjusted annual gross income is $215,000. If we add the $45,000 investment income they earned from their house sale to the annual income, we get $215,000 + $45,000 = $260,000 (which is $10,000 above the $250,000 surtax limit). So now Jane and John will have to pay 3.8% investment surtax on $10,000.

In the above scenario I used a home sale as an example but the investment surtax also applies to dividends, interest, rent, capital gains, and annuities.

Itemized Medical Deduction Limit
(affects middle class)

This one will affect everyone including the middle class. Right now the itemized deduction limit for medical expenses is above 7.5% of your annual gross income. This limit will increase to 10% starting 2013. The limit increase will take effect in 2017 if you or your spouse is older than 65.

Example: Right now if your annual gross income is $60,000, you can deduct any of your medical expenses that are more than $4500 (7.5% of your income); Starting 2013 you will only be able to claim deduction for medical expenses that are over $6,000 (10% of your income).

Limits on Flexible Spending Account
(affects middle class)

Under the current FSA law many of us take advantage of the flexible spending accounts by putting pre-tax money aside for medical expenses. There is no limit as to how much we can put aside. Starting in 2013 there will be a yearly limit of $2500 on all flexible spending accounts.

Health Savings Account Penalty
(affects middle class)

The penalty for using HSA on non-medical expenses is increased to 20% (previously 10%).

Over the Counter Medicine Tax
(affects middle class)

Previously Americans were able to use HSA and FSA’s pre-tax dollars on over the counter medicine purchases. This is no longer allowed and all those purchases will be taxed.

Individual Mandate Tax
(affects middle class)

Starting 2014 you will have to pay a penalty if you do not have health insurance. The amount of penalty will depend on your income and it will rise every year until 2016. Couples could expect to pay the higher of $1360 or 2.5% of adjusted gross income.

Medical Device Tax
(will indirectly affect the middle class)

Starting 2013, any medical device that is more than $100 will have a 2.3% tax. Hospitals, healthcare companies, doctors and device manufacturers will incur this tax and the middle class will suffer because the higher costs will be passed onto them.

Cadillac Tax

You will incur a 40% tax if the combined total of all benefits on your healthcare plan exceeds annual thresholds of $8,500 for individuals or $23,000 for families. Different ways to avoid this tax would be to raise deductibles or copayments to bring down premium costs, add a lower cost health plan as an alternative or terminate employer contributions to health or flexible savings accounts.

The Cadillac tax is scary because it could creep up on you due to inflation. The inflation can, over time, make your plan fall into the Cadillac tax limits.

It is important that we familiarize ourselves with the upcoming taxes. As for deciding if ObamaCare is good or bad, I'll leave that to the readers.