The “fiscal cliff” debate is theater. No one can be sure of what is going to happen come Jan. 1. President Obama’s 2010 health reform law, however, is certain to change the tax code in 2013. Starting next year, five new tax increases will begin to raise $258.2 billion in new revenue over seven years.
The top tax rates on capital gains and dividends will jump from 15% to 18.8%. The 3.8% surtax on unearned income (income earned through interest, rents, dividends, annuities, royalties, etc.) will only fall on the wealthiest two percent: households making at least $250,000, or individuals making more than $200,000. The 3.8% surtax is a big adjustment, but the current 15% tax rate is the lowest it’s been since World War II. If Congress allows the 2003 Bush tax rates to expire, the top rate on capital gains will rise to 23.8%, and the top rate on dividends will leap to 43.4%
A new tax will charge the wealthy to help pay for Medicare’s hospital insurance. There will be an additional 0.9% tax on earned income in excess of $250,000 for families and $200,000 for individuals to help pay for Medicare Part A, which covers hospital stays, nursing facilities, and hospice care. In addition to the 3.8% surtax, the hospital insurance tax will raise $20.5 billion in new revenue next year, and $210 billion over the next seven.
Manufactures and importers of certain medical devices will be taxed 2.3% of the price of the product. Devices will not include retail objects like corrective lenses or hearing aids, but will include products like defibrillators, pacemakers, artificial joints, stents, and those involved in cancer treatments, angioplasty and vascular surgery. More than 800 companies from the powerful medical device industry have protested the tax, which will raise $1.8 billion next year, and $20 billion over the next seven years.
Under current law, Americans get a tax deduction if all their medical expenses exceed 7.5% of what they make (minus exceptions and deductions). That number will rise to 10% for almost everyone in 2013. Those that are 65 and older get a pass for 3 years. This tax raises $400 million next year, $15.2 billion over seven years.
33 million workers choose to participate in a Flexible Spending Accounts (FSA), which count certain healthcare expenses not covered by insurance as tax deductible. Employers set the limit at how much employees can take out of their salaries, and most companies set the FSA limit around $5,000. So if you knew your child was going to need $5,000 worth of braces next year, you could put that much money in a FSA, saving on federal income, Social Security, Medicare, and in some states, state income taxes, while the employer saves on Social Security and Medicare taxes. Under the Affordable Care Act, the government will set a first-ever FSA limit at $2,500. The average employee contribution today is $1,496, so most people that do use FSAs won’t be affected. This tax is expected to raise $1.5 billion next year, $13 billion over the next seven years.
It’s worth noting that these taxes represent a tiny portion of federal revenue. President Obama’s 2013 budget projects that the government will raise around $2.9 trillion next year–these five taxes combined would account for 0.8% of that total. Nonetheless, if you are wealthy, spend a significant amount of your earnings on healthcare, or manufacture medical devices (it is unclear how the cost will be shared by the consumer), you will see your taxes go up.