At the recent American Academy of Estate Planning Attorneys Summit in San Diego, I spoke about tax law changes that may be relevant to people who practice estate planning law. Among other topics, I spoke about the Patent Protection and Affordable Care Act, also known as “Obamacare.” Now that Obamacare has been upheld by the U.S. Supreme Court and the President has been reelected, the law is sure to go into effect fully.
Under the Affordable Care Act, there will be at least seven lesser or avoidable taxes based on an individual’s decision to refrain from participating in certain activities. These include:
- A 10% excise tax on tanning salons
- An inability to use pre-tax flexible spending accounts on nonprescription medications
- Nonmedical withdraws from health savings accounts being taxed at 20% (up from 10%)
- Beginning in 2013, the maximum contribution to a pre-tax healthcare flexible spending account set at $2,500
- Beginning in 2013, medical expenses are taxed only to the extent they exceed 10% of adjusted gross income (the 7.5% limit still applies to people over 65 until 2016)
- Taxes on individuals not complying with the mandate, which may range from $0 to $4,500, and
- Beginning in 2018, a 40% tax on “Cadillac” health plans.
There is also the addition of a Medicare Earnings Tax on earnings above $200,000 (unmarried filers) ($250,000 for married filing joint and $125,000 for married filing separate filers). There is little that people can do to avoid these taxes, which will go up .9% from the existing rate to 2.35% (except to earn less).
One of the largest changes is the initiation of an investment income surtax of 3.8%, which applies to the lesser of the investment income or the amount that income exceeds the threshold. The threshold is $200,000 of Adjusted Gross Income (“AGI”) (unmarried filers or head of household) ($250,000 AGI for married filing joint and $125,000 AGI for married filing separate filers) ($12,000 AGI for trusts and estates).
However, people are not without options concerning the new surtax. Investors can use Roth IRAs (which do not give off taxable income), installment sales (which spread out taxable income), contributions to charitable remainder trusts (which act to defer taxable income), or reduce net investment income.
Obamacare is now sure to be part of the tax planning landscape for years to come. Be sure you know how to advise your clients about these new taxes.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128