An Unhealthy Dose of Obamacare Taxes

We don't know where the Affordable Care Act is taking us, but we do know that it will cost a bundle.

In what was already an eventful year, Obamacare generated lots of buzz in 2012, first in the lead-up to the Supreme Court's much-anticipated ruling on the constitutionality of the Affordable Care Act, and then in the chatter-heavy aftermath of the surprise decision upholding the law. After that, headlines focused on Medicaid expansion (which states would and which states wouldn't) and health insurance exchanges (which states would take the task on, and which would tell the feds to tackle the mess themselves). But government regulations and new or expanded bureaucracies don't pay for themselves, you know; they require tax-funding. And we heard relatively little about the plague of taxes and tax changes that now sweep over us with the dawn of 2013.

Actually, we may have heard a little. The medical device industry had the resources to make a futile fuss relatively early about the 2.3 percent tax that is being levied on gross sales, without regard to profitability. That's right, in the red, or in the black, the medical device industry will have to give the government a cut. According to the Medical Devices Manufacturers Association, a trade group, "Many companies will owe more in taxes than they generate from their operations." The tax, which has its own IRS FAQ, along with 10 pages of helpful guidance (PDF), has somewhat disheartened crafters of pacemakers and brain implants. A survey conducted by the Massachusetts Medical Devices Journal found that "more than 40% of member company executives anticipate job losses as a result of the 2.3% medtech levy."

Speaking of brain implants, Frank Fischer, chief executive of NeuroPace Inc., a start-up company that manufactures just that, told The Wall Street Journal:

"If we were trying to start the company today, I don't believe we'd be able to fund it," he said. "[With] the length of time the regulatory process has been taking over [the] last several years, and this additional issue of the tax on top of that, I believe many companies—if they weren't in the later stages of approval—wouldn't get the funding to get there."

Critics say that the tax could will stifle innovation, although it's just as likely to drive companies to move operations overseas.

But the medical device industry is an organized business community that can fight its own battles. Relatively unprepared individuals are targeted by the Additional Medicare Tax, which whacks higher-income Americans with a 0.9 percent surcharge on wages, Railroad Retirement Tax Act compensation, and self-employment income. The tax boosts the take on any income currently subject to Medicare tax, above the applicable threshold:

  • $250,000 for married couples filing jointly
  • $200,000 for individuals
  • $125,000 if you're married and filing singly

As it turns out, there is a marriage penalty built into Obamacare. Surprise!

As Grace-Marie Turner of the Galen Institute points out, "This means the current 2.9% Medicare payroll tax will be increased to a total of 3.8% — a big hit especially for the self-employed." Keep in mind that the original 2.9 percent is split between employees and employers (nominally, anyway, though the employer's share is generally believed to be reflected in reduced compensation), while the new tax comes straight out of the taxpayer's pocket.

Oh, and note that, according to the IRS's oh-so-helpful FAQ, if you're married and make over 200 grand, but your spouse's income doesn't push you over the $250K limit, too bad for you. Your employer has to withhold the tax and you get to ask for it back when you file. Don't expect a thank-you note for that loan.

Anybody at that income level probably has some investment income, which also comes in for attention from the revenue-hungry Obamacare machine. That attention arrives in the form of a 3.8 percent hit at the same thresholds as wage income, pointed out above. As short and not-so-sweet as that sounds, the tax on investments is far from simple. There is, of course, a handy-dandy IRS FAQ, or you can take a quick glance through the tax agency's 42 pages (PDF) of explanatory rule-making. However, Amy Feldman, a finance wiz at Reuters, offers a bit of caution to those who have even slightly complicated finances:

Medicare surcharge strategies get more complex for those who have trusts ... most trusts — with the exception of charitable trusts, which are exempt — will be affected. One possible strategy: Trusts may be able to reduce or eliminate the Medicare tax by distributing income to beneficiaries.

Feldman also warns that interest payments on intra-family loans "could be" subject to the Obamacare tax. Don't you love that "could be" element of uncertainty when interpreting elements of a tax code that's enforced by fines and prison sentences?

Of course, most Americans don't make enough money to be affected by the Additional Medicare Tax or the Net Investment Tax, but many of us still enjoy using Flexible Savings Accounts. Tax-free contributions to these were uncapped in the past, potentially giving people a great deal of control over their healthcare. Now, though, FSA contributions are limited to $2,500. Anyway, as the IRS informs us, except for insulin, FSAs were already hobbled in 2011, ever since which "the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements (FSAs) or health reimbursement arrangements unless a prescription is obtained." Health Savings Accounts and Archer Medical Savings Accounts got similar treatment.

In another sneaky rule-shift, medical deductions get pushed a little further out of reach as the feds raise the bar you have to reach on expenses before you can write them off. Says the Medicare Newsgroup:

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • dan'o||

    My brother in law, a mech engineer for GE informed me months ago that production for several devices has already been moved to China. The QC on the imported gear is so unbelievably shitty, he claims that every device he's inspected should be recalled.
    Oh yea, FIRST!

  • JWatts||

    ""the IRS has announced it will impose ObamaCare’s taxes on employers and individuals whom Congress expressly exempted from those taxes, and will send potentially hundreds of billions of taxpayer dollars to private health insurance companies, also contrary to the plain language of the statute.""

    The IRS reports to Obama and he doesn't care what the law actually says.

  • Brutus||

    L'etat, c'est moi!

  • Kyfho Myoba||

    Because Fuck You, that's why!

  • Sevo||

    Pretty sure shithead was posting just a couple of days ago that tax increases all came from Repubs.
    Maybe he was just mis-informed?

  • MoreFreedom||

    Obama did promise to not raise taxes on anyone but millionaires. Perhaps some still believe him when he opens his mouth.

  • Libertarius||

    The obozo meltdown is beginning as we speak. The first term was all theoretical (all class warfare and collectivism, all the time), and though there were many scandals, 2013 is when the obamutrons begin to get what they've asked for.

    I am already seeing glitches in the matrix. My facebook is filled with people saying "WTF is up with my taxes, man!?" They thought they wanted obozoism, they voted for obamugabe, and now they will reap their just rewards.

    Hey egalitarian collectivists: when a politician says he's going to raise the other guys taxes, he isn't talking to you!

  • XM||

    Obama fans are already saying things like "that's ok, because payroll tax was restored pre Bush levels and we're funding more for our retirement".

    Some people still think SS will be fine shape by the time they retire.

  • Sevo||

    "Obama fans are already saying things like "that's ok, because payroll tax was restored pre Bush levels and we're funding more for our retirement"."

    They could pay into retirement absent coercion, but it's better since someone *forces* them to do so? Pathetic.
    'Momma, make me a good person! Force me to be good! I can't be good without your whips and chains (and guns)! I'm a brain-dead lefty!"

  • MoreFreedom||

    Government would be much smaller if it only dealt with those who initiate force against someone or their property. But when government protects us from ourselves, there is no limit to government's ability to control our lives.

  • Sevo||

    "when a politician says he's going to raise the other guys taxes, he isn't talking to you!"

    I'm stealing that.

  • SweatingGin||

    The raised amount for itemized deductions is new to me, I hadn't realized that was in there. Not being able to itemize deductions might leave my house a bad enough deal that I just walk away at that point.


  • MoreFreedom||

    I believe you've misread the article. The raised amount applies to those who itemized and deduct the medical expenses. Not mortgage interest.

  • uythsb||

    Happy New Year,NBA ,NFL 2013

  • pc tablet||

    Medicare surcharge strategies get more complex for those who have trusts ... most trusts — with the exception of charitable trusts, which are exempt — will be affected. One possible strategy: Trusts may be able to reduce or eliminate the Medicare tax by distributing income to beneficiaries. thanks the information !!

  • Mandate Amendment||

    This article is so true and so depressing, for those of us who realize that if the government ran food distribution, something we need as much and more often than health care, there would be far more people starving and much less choice. It seems so unreal in light of how much information is out there today that people are still fooled by the allure of government and its promises to fix the facts of life.

    There is although one last hope to end not just the Obamacare assault on the health care industry, but also to end the ominous and definite effects the Roberts' decision will have on future generations as government and corporations combine to force American citizens to do just about anything by way of the taxation.

    It is called the Mandate Amendment to the US Constitution. It is short, simple, and common sense:

    “Congress shall make no law mandating the purchase of a product or service from a private entity”

    This is a bold and courageous effort to strike at the heart of this precedent now while much of our country is appalled by the decision and the infrastructure and dependence upon the law is not sewn into the fabric of our country.

    Please Google Mandate Amendment for more information or find us on Facebook and Twitter. We have been successful in opening up coalitions in Massachusetts, Hawaii, and California in the very short amount of time. We have also earned the unanimous endorsement of the Mass. Libertarian Association. We are beginning, please help.

  • Brutus||

    Not a bad idea, but at first glance it seems too narrow. Would Obamacare's mandate even be outlawed by this?

  • Libertarius||

    This is a great idea. Since the Roberts decision, we have to get rid of both obozokare and the hideous precedent established by Roberts.

  • ArbutusJoe||

    So this wouldn't cover a mandate to buy a mortgage from Fannie Mae or some other quasi-governmental agency, right?

    The problem isn't that we lack Constitutional safeguards; our vulnerability is in the lack of intellectual safeguards among the voting populace. A SCOTUS decision that ignores this prohibition would be yawned at by most Americans, just like a trillion dollar increase in spending or the money supply.

  • MoreFreedom||

    Why just prohibit government from mandating purchases? Instead, let's separate state and commerce. Government involvement should only occur when there are disputes among private parties.

    I'd like to have get our freedom to contract back. Instead we've tens of thousands of pages of "regulations" that prohibit transactions we might like to do.

    Forcing citizens to buy products is just more crony crapitalism. As someone once said, they only way to get the money out of government, is to get government out of business.

  • Anton2013||

    Well it will be really matter of concern if taxes gets raised, as it will affect so many people and most important is Medicare should not be affected by this.

  • chat sohbet||

    Remember though, people are fundamentally nice sohbet


Get Reason's print or digital edition before it’s posted online

  • Progressive Puritans: From e-cigs to sex classifieds, the once transgressive left wants to criminalize fun.
  • Port Authoritarians: Chris Christie’s Bridgegate scandal
  • The Menace of Secret Government: Obama’s proposed intelligence reforms don’t safeguard civil liberties