Content of the material
- The Medicare Tax Only Affects High Income Taxpayers
- The Individual Mandate
- Sale of S corporation equity interests
- Section 338(h)(10) and Section 336(e) elections
- How The Cash Balance Pension Helps You Reduce Your Taxes And Boost Retirement Security
- ACA Taxes That Survived
- Medical Deduction Threshold Tax
- Health Savings Accounts Caps
- Medicine Cabinet Tax
- Indoor Tanning Tax
- Medicare Tax
- Net Investment Income Tax
- Do I Need to Pay the Net Investment Income Tax?
The Medicare Tax Only Affects High Income Taxpayers
The tax applies only to people with relatively high incomes. If you’re single, you must pay the tax only if your adjusted gross income (AGI) is over $200,000. Married taxpayers filing jointly must have an AGI over $250,000 to be subject to the tax. Your adjusted gross income is the number on the bottom of your IRS Form 1040. It consists of your income from almost all sources, including wages, interest income, dividend income, income from certain retirement accounts, capital gains, alimony received, rental income, royalty income, and unemployment compensation, reduced by certain “above the line” deductions such as IRA contributions and one-half of self-employment taxes.
The Individual Mandate
For most Americans, the biggest tax issue came from the individual mandate, which stated that U.S. adults who could afford to do so must sign up for healthcare, either directly through an insurance company or via a state or federal healthcare insurance exchange.
Exceptions to this mandatory healthcare purchasing rule were granted if:
- The premium from the lowest-priced bronze plan purchased through a health insurance exchange in someone’s home state was more than a certain percentage of the purchaser’s household annual income.
- The purchaser’s annual household income was below the threshold for Internal Revenue Service (IRS) tax filing statutes.
Some taxpayers were also granted a tax exemption for religious beliefs, not being a U.S. citizen, being incarcerated, or belonging to an American Indian tribe.
Anyone who didn’t buy qualifying health insurance had to pay an income surtax. The extra tax was calculated by taking the higher of the listed percentage of adjusted gross income (AGI) or the dollar figure shown below:
Tax penalties for failure to comply with the individual mandate raised $4 billion for the government in 2018, the final year it was in effect.
On the employer side, companies with 50 or more employees faced paying $2,000 (non-deductible and indexed for inflation) per full-time employee for not offering health coverage. This fee has been raised gradually since 2015 and now stands at $2,700 for 2021. This is called the employer shared responsibility payment.
Passed in December 2017, the Tax Cuts and Jobs Act included a permanent repeal of the individual mandate provision of the Affordable Care Act, as of the 2019 tax year.
Sale of S corporation equity interests
Absent further guidance, the sale of S corporation stock, even by a shareholder who actively participates in the business, would appear to be subject to the tax. Fortunately, the law itself provides an exception. Section 1411(c)(4) states that, in the case of a disposition of an interest in a partnership or S corporation, gain is taken into account for purposes of the tax only to the extent of the net gain that would be taken into account if all property of the partnership or S corporation were sold for fair market value immediately before the disposition of such interest.
Section 338(h)(10) and Section 336(e) elections
In a sale of S corporation stock in conjunction with a Section 338(h)(10) or Section 336(e) election, the stock sale is disregarded and the transaction is taxable as a deemed asset sale.
Prop. Reg. §1.1411-7(a)(4)(i) states that the transaction will as a disposition of the underlying assets.
How The Cash Balance Pension Helps You Reduce Your Taxes And Boost Retirement Security
Looking for more tax deductions to help your business pay fewer taxes? A Cash Balance Pension Plan may be the keep to keeping more of your hard earned money.
ACA Taxes That Survived
Medical Deduction Threshold Tax
The ACA brought with it a $15 billion tax on individuals who take a deduction based on having high medical bills. The old threshold of deductible medical expenses exceeding 7.5% of AGI was replaced with a threshold of 10% from 2013 to 2016. Americans aged 65 and over were exempt from this higher threshold. The Tax Cuts and Jobs Act reinstated the former threshold of 7.5% of AGI for tax years 2017 and 2018. The Further Consolidated Appropriations Act in December 2019 also extended the lower 7.5% AGI threshold for tax years 2019 and 2020.
Health Savings Accounts Caps
The ACA placed an annual contribution limit on health savings accounts, which for the 2021 tax year is $3,600 (increasing to $3,650 in 2022) for individual coverage and $7,200 ($7,300 in 2022) for family coverage. The limit on flexible spending accounts (FSAs) is $2,750 for the 2021 tax year and $2,850 for 2022.
Medicine Cabinet Tax
One ACA tax estimated at $5 billion, called the medicine cabinet tax, also outlined that U.S. adults could not use HSAs, FSAs, or health reimbursement pretax dollars to buy nonprescription, over-the-counter medicines. This provision was permanently repealed as of the 2020 tax year as part of the CARES Act. Certain over-the-counter medications and products, as well as menstrual care products, are now eligible for HSA and FSA reimbursement without a prescription.
Indoor Tanning Tax
This tax, which went into effect in July 2010, placed a 10% excise tax on U.S. indoor tanning salons. While it was expected to bring in $1 billion in new tax revenues during the first four years, the tax has since been deemed a failure, raising just over $367 million in its first four years. It also contributed to the demise of the indoor tanning salon industry, which proponents of the provision still count as a public health win. The tax is still in effect as of 2021.
The 0.9% Medicare surtax applied to wages and self-employment income over $200,000 for individuals and $250,000 for married couples remains unaffected by subsequent suspensions and repeals, as it would be unpopular to repeal an additional tax on high earners that funds Medicare.
Net Investment Income Tax
The 3.8% ACA tax on net investment income applies to unincorporated taxpayers (basically individuals, estates, and certain trusts) who have a modified adjusted gross income (MAGI) above these annual income levels:
- $250,000 in the case of married taxpayers filing a joint return or a surviving spouse
- $125,000 in the case of a married taxpayer filing separately
- $250,000 for a qualifying widow(er) with a dependent child
- $200,000 for everyone else, except estates and trusts, where the threshold is equal to the highest amount at which the maximum tax rate begins
These rates are not indexed for inflation. The tax is still in effect as of 2021.
Do I Need to Pay the Net Investment Income Tax?
The net investment income tax thresholds are based on your filing status and income. You are likely subject to this tax if you have investment income and your modified adjusted gross income exceeds certain thresholds.
This tax is paid in addition to your income tax obligation. It's also over and above what you paid into Medicare through withholding from your earned income or estimated tax payments. But you're only subject to this tax if you have net investment income and your MAGI exceeds these thresholds.
The net investment income tax is imposed on estates and trusts, as well as individuals.
For individuals, it applies to U.S. citizens and resident aliens. It does not apply to non-resident aliens unless they've elected to be treated as a resident of the U.S. for tax purposes so they can file joint married tax returns.
The net investment income tax applies to estates and trusts when they have net investment income and have adjusted gross incomes for the year exceed the dollar amount at which the highest tax bracket begins.
Grantor trusts and trusts that are exempt from income taxes, such as charitable remainder trusts, are exempt from the net investment income tax. In most cases, taxes on grantor trusts are payable by the individual—the grantor—who formed and maintains them.