While the debate about the fiscal cliff rages on, not many people are talking about the stealth tax increases in healthcare expenses. I have witnessed them since 2011, when under ObamaCare provisions, OTC medications started requiring a doctor's prescription for FSA reimbursement and a 20% penalty for the use of a health spending account to pay for non-qualified expenses was introduced. They are getting much worse in 2013.
Lower FSA cap starting in 2013
For 2013, IRS has reduced the maximum FSA contribution to $2,500 per employee, whether or not they have dependents. Currently, there are no official limits, though most employers place annual caps of around $3,000 to $5,000. Generally my family's FSA contributions are typically less than the average of $1,426 (Mercer Survey, 2010). However, unexpected or planned expenses like root canals or orthodontia, LASIK, ACL reconstruction, treatments of plantar fasciitis, wisdom tooth extraction, sports medicine, physical therapy, chiropractic or acupuncture sessions etc. can propel health care spending easily above $2,500, which will then be post-tax. This means that if I had planned to put away $5,000, but can only withhold $2,500 in a FSA, my taxes would increase by $375-$990, depending on the federal income tax rate.
Higher threshold on health care expense deductions
According to IRS rules, taxpayers itemizing their tax returns can deduct medical and dental expenses for themselves, spouse or children as long as they exceed 7.5% of adjusted gross income (AGI). Starting in 2013, taxpayers can only deduct the amount above 10% of AGI.
This means a single person who has AGI of $100,000 and belongs to a 31% marginal tax rate can expect to pay $775 more in taxes.
Health insurance is a tax
Finally, in June 2012, the U.S. Supreme Court ruled that an individual mandate requiring people to have health insurance is essentially valid as a tax, even though it is impermissible under the Constitution's commerce clause. Starting in 2014, this allows the IRS to penalize people who do not have health insurance to pay 1 percent of their income. According to the Common Wealth Fund, average health insurance expenses are more than 20% of Americans' income and they have outpaced the rate of income growth. In the past three years, my husband's employer has faced healthcare premium expenses of 10-20% each year. Although we were able to keep our health care insurance costs flat by opting for a high deductible health plan (HDHP), healthcare insurance is set to become a tax that we cannot appeal or opt out of.
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