Tax Implications of the ACA – Just Bad Timing Part II

Last month I wrote about the implications to certain taxpayers resulting from some of the provisions contained in the Affordable Care Act. The Hospital Insurance tax rate, currently 1.45% is imposed on all wages at both the employee and employer level (a combined tax rate of 2.9%). Beginning in 2013, an additional HI rate of .9% will be imposed on wages in excess of $200,000 ($250,000 for a married couple). This tax increase is only on the employee. In addition, a 3.8% tax on passive income is scheduled to take effect. This tax is imposed on the lesser of the amount of income received from dividends, interest annuities, rents, royalties and capital gains; or the amount by which modified adjusted gross income exceeds a threshold amount ($200,000 for individuals and $250,000 for married couples).
I also mentioned the expiration of the Bush tax cuts. Currently, the maximum tax rate on taxable income is 35%. Next year the rate is scheduled to revert to 39.6%. The tax rate on dividends will increase from 15% to 39.6%. Perhaps the two largest tax increases will be the expiration of the Alternative Minimum Tax patch and the reversion of the FICA tax rate on employee wages from 4.2% to 6.2%. The FICA rate increase will affect all workers. The expiration of the AMT patch, which expired at the end of 2011, is expected to adversely impact over 30 million taxpayers.
On August 22, the Congressional Budget Office released a report warning that the expiration of the Bush tax cuts, combined with the scheduled spending cuts, will drive the U.S. economy into recession. In fact, the CBO estimates unemployment will increase to over 9% (currently it is 8.3%) and that gross domestic product would shrink by .5%. The contraction would be much more severe in the first half of the year. CBO Director Doug Elmendorf indicated the country will have 2 million fewer jobs.
Tax increases may be necessary, but not at this time. In my opinion, creating jobs is a better way at this time to expand the revenue base. The Affordable Care Act has many benefits. The costs of some of these benefits will not be known for a while. Driving the country into recession and shrinking the revenue base is not the wise course of action.

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