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Explore: Tax Implications of Fully Repealing the ACA

Tax Implications of Fully Repealing the ACA

ACA

One of many contentious political issues today, the future of healthcare in America has sparked debate across the country. As President Trump settles into office, it has become clear that changes are coming, whether in the form of smaller-scale adjustments to the Affordable Care Act (ACA) or a full repeal and replacement of the law. While we here at Condor Capital do not involve ourselves in politics, we do keep our finger on the pulse of the tax code, which would change in the following ways should the law commonly known as Obamacare be repealed.

For individuals in the highest tax brackets, any repeal would result in generally lower tax burdens. This is because when the ACA was implemented in 2013, it instituted two tax increases on individuals earning more than $200,000 per year (or married couples earning over $250,000) in order to help fund Medicare. The first was a 3.8% net investment income tax that imposed a levy on unearned income such as capital gains, interest, dividends, and rental income. While the law’s repeal would be a pure tax cut unlikely to change the investing habits of the highest earners, individuals and couples on the cusp of that income threshold may be freer to realize capital gains or otherwise generate more current income from their investment portfolios. The second tax increase imposed on top earners by the ACA was a 0.9% increase in the Medicare Payroll Tax. Upon repeal, this would be eliminated, bringing the Medicare tax rate on earned income for the affluent back down to pre-2013 levels.

Individuals outside of the upper income brackets would see tax changes from the law’s repeal as well. The so-called “floor” for deducting medical expenses from your Adjusted Gross Income (AGI) would fall from 10% to the pre-Obamacare 7.5%. This would mean that taxpayers’ medical expenses could constitute a lower percentage of overall income and still be tax-deductible. That said, the Alternative Minimum Tax (AMT) deduction “floor” would remain at 10%, potentially pushing more taxpayers into the AMT and negating any benefit of changes to the AGI rate for these individuals. Additionally, the financial penalty for not having insurance, which was set by the ACA as the lesser of 2.5% of income or $695 per uninsured family member, would be removed. Finally, a tax credit implemented by Obamacare to help offset the costs of health insurance to lower income families, known as the premium assistance credit, would be eliminated with the law’s repeal.

Families and individual taxpayers are not the only ones whose tax bills are affected by healthcare policy. According to the Kaiser Family Foundation, more than half of all workers are offered health coverage sponsored by their employers, a trend is even more pronounced for full-time and higher-earning employees. As a result, any efforts to repeal the ACA would very likely impact the bottom lines of American employers. One of the more controversial aspects of the 2013 health law was a tax aimed at the most generous employee benefit packages, commonly known as the “Cadillac tax.” While this component of the law has never actually gone into effect and is not scheduled to until 2020, repeal would permanently eliminate the possibility of its implementation. An adjustment to employers’ tax filing procedures would fall by the wayside as well. One of the smaller effects of any policy change, the provision requiring business owners to report the value of health care coverage on W-2 tax forms would be no more. Finally, a penalty imposed on employers unwilling to offer health care coverage to their workers would cease to exist.

Please keep in mind that these would be the result of a full repeal of the ACA, while a partial repeal could result in any combination of the above-mentioned changes. Moreover, replacement efforts will impose an entirely new set of circumstances that are not yet clear. That being said, one aspect of replacement that seems likely is an emphasis on Health Savings Accounts (HSAs). These tax-advantaged accounts, which are akin to 529 accounts used for education expenses, allow individuals and employers to make pre-tax contributions and income-tax free withdrawals as long as the funds are used for qualified medical expenses. A repeal of the ACA would only make these accounts more favorable by peeling back two restrictions. First, a rule barring over-the-counter prescription drug purchases from the list of qualified medical expenses would be repealed, increasing the flexibility of what these accounts could be used for. Second, the penalty for non-qualified purchases from the accounts would be cut in half from 20% down to 10%.

Despite the uncertainty surrounding the specifics of any repeal and replace efforts moving forward, the potential changes mentioned here cover the major tax implications instituted by the Affordable Care Act and represent the scope of what could, and likely will, change.