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Supreme Court upholds health care mandate as a tax

June 28, 2012

By Robert A. Green, CPA

I guessed it.

The Supreme Court reclassified the health care mandate as a tax, which is what many people said it was from the start. It was always going to be charged and collected on income tax returns. Had Chief Justice Roberts said it was unconstitutional, the whole bill would have collapsed and there would have been great disarray and wasted cost. President Obama didn’t sell it as a tax to avoid tax hike dissent and politics.

As tax preparers, we will have to deal with this health care tax on annual income tax returns. We deal with all sorts of taxes, and the list is growing, unfortunately. Income, FICA, Medicare and now health care taxes.

In addition to this health care tax, 2013 will bring the health care act's other tax — the Medicare Surtax, otherwise labeled the Medicare Hospital Insurance ("HI") tax. The Supreme Court left all the Act's tax provisions in place. This Medicare surcharge applies to wages and self-employment income in excess of $200,000/$250,000 (married couples). The surtax rate is 0.9 percent on top of the existing Medicare tax rate of 2.9 percent — a combined rate of 3.8 percent. Remember, unlike with FICA, Medicare taxes apply on unlimited earned income; there is no social security tax base of $110,100. (Click here for more information.)

There's a bombshell for our trader clients, too. For the first time in many decades, as part of the Affordable Care Act, Congress was able to break through the Chinese Wall to subject investment and passive income to this otherwise earned-income-related Medicare tax. That's bad news for our profitable trader and investor clients.

Like other tax hikes President Obama supports, this tax hike applies to higher-income folks. First, calculate adjusted gross income in excess of $200,000 (single) or $250,000 (married filing joint). Next, determine your total income from interest, dividends, capital gains, rents and passive income. The Medicare Surtax will apply to the lessor of these two calculations.

2013 is shaping up to be a year of great tax change and related uncertainty and disarray. In addition to these health-care taxes, the other big bombshell — the Bush-era tax cuts — is scheduled to expire at year end 2012. The estate tax is scheduled to come back with a vengeance, too.

All of these tax changes — AND TAX HIKES — will throw tax planning upside down. It's wise to consult with us about it before year-end.

To see the math on how tax rates will explode higher after expiration of the Bush-era tax cuts, see Green's 2012 Trader Tax Guide, Chapter 9 Tax Planning & Tax Law Changes.

Watch my latest video on why Congress should immediately extend the Bush-era tax cuts for everyone now. With tax reform promised in 2013, it's crazy to crash the tax code with sweeping changes from Bush-era tax cut expiration, only to change it again with major reform shortly thereafter.

What's the lesson? You can't keep making major changes last minute and causing great uncertainty. We all spend way too much time, effort and money dealing with change and it's counterproductive. That's probably why Judge Roberts took the easy way out — just call it a tax.

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