BOSTON ( TheStreet) -- Now in October we have falling leaves, pumpkins, the baseball playoffs and, oh yes, a slew of new taxes linked to the formal rollout of Obamacare. The tax portion of the Affordable Care Act has taken a back seat to other, mostly political issues, but it's the central reason the ACA is even alive today. The U.S. Supreme Court, in a 5-4 vote, upheld Obamacare due primarily to the individual mandate portion of the ACA. Chief Justice John Roberts ruled the mandate's penalty for not signing up for Obamacare was constitutional because it was deemed a tax, an argument rarely made by proponents when the legislation was being written and debated. Now the tax issue begins to take center stage with this week's open enrollment phase. The law phases in new taxes on individuals, employers and insurance companies. To explain those taxes and their impact on Americans, we reached out to Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research.
Here's what you need to know about the tax provision of the ACA: Increased Medicare tax for high earners. An additional 0.9% Medicare tax will be levied on earned income over $200,000 for single filers and over $250,000 for married couples filing jointly. That, according to Spiegelman, means a new marginal Medicare tax of 2.35% on earned income for high earners (the current rate is 1.45%, plus 0.9% for amounts over the threshold). Surtax on unearned income. The Affordable Care Act will add a 3.8% surtax on net investment income over the modified adjusted gross income threshold of $200,000 for single filers and $250,000 for married filers. Net investment income includes interest, dividends, royalties, rental income, gross income from a trade or business involving passive activities and net gain from disposition of property (other than property held in a trade or business). Spiegelman says that with the new surtax, long-term capital gains and qualified dividends are taxed at a top rate of 23.8%, while nonqualified dividends, interest and rental income are taxed at a top ordinary rate of 43.4%. "This does not include the 'stealth tax' related to the phase-out of personal exemptions and itemized deductions for high earners, or the marginal rate 'marriage penalty' that's set to come back for tax years beginning after Dec. 31, 2012," he says.
Modified threshold for claiming medical expense deductions. Obamacare increases the adjusted gross income threshold for claiming an itemized deduction for medical expenses from 7.5% to 10%. The 7.5% threshold will continue to apply through 2016 to individuals 65 and older and their spouses, Spiegelman explains. A $2,500 limit on health care FSA contributions. The Affordable Care Act limits contributions to health care flexible spending accounts to $2,500 per year, which is lower than previous years. "This lower limit could potentially increase an individual's tax liability, if they were setting aside more than $2,500," he adds. The dollar amount will be inflation-indexed after 2013. Penalty for failing to have insurance. The penalty for the uninsured starts at $95, or 1% of taxable income in 2014, whichever is greater. In 2016, it will increase to the greater of $695 or 2.5% of taxable income. Unlike income levels subject to increased Medicare taxes, which are not indexed for inflation, the penalty for failure to insure will be indexed to inflation. Subsidies will be made available to those who can't afford insurance, Spiegelman says. With the tax portion of Obamacare now in play, the scramble will be on for Americans unsure of their financial vulnerability to Uncle Sam. Check the list above, and if necessary, consult your accountant or financial adviser to see where you stand.