HEALTHCARE ACT CONSTITUTIONAL: TAXES AHEAD

Unless you've found a way to live without the news media, you've already heard that the U.S. Supreme Court upheld most of the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 - collectively referred to as the "healthcare act."

The provision of the law that requires individuals to pay a penalty if they fail to carry health insurance for themselves and their dependents was found to be constitutional. But the requirement to actually purchase insurance and the mechanism used to expand Medicaid coverage were determined to be unconstitutional (National Federation of Independent Business v. Sebelius, SCt, 2012 USTC ¶50,423, June 29, 2012).

Understanding the penalty

The court concluded that the federal government does not have the power to require individuals to buy health insurance (the "individual mandate"). However, it has the power to impose a penalty on those who fail to do so.

The mandate exceeds the federal government's powers under the Commerce Clause (Article I, Section 8, Clause 3), according to the court, because it would require inactive individuals to become active in interstate commerce. In addition, regardless of how integral the mandate is to the healthcare reform law as a whole, the Necessary and Proper Clause (Article I, Section 8, Clause 18) does not provide independent authority for it.

The court also concluded that the "shared responsibility payment" imposed for violating the mandate is a constitutional exercise of the federal government's taxing power under Article I, Section 8, Clause 1.

Although identified as a penalty in the healthcare legislation, the payment for violating the mandate is actually a tax, the court said.

The payment is considered a tax for the following reasons:

  • It is not intended to be punitive.
  • Its amount is relatively small.
  • It applies even if the taxpayer does not knowingly violate the mandate.
  • The IRS has the sole authority to assess and collect it.

The payment does not violate the prohibition on direct or capitation taxes (Article I, Section 9, Clause 4) because it is triggered by specific circumstances. And it is not imposed on every person or on the ownership of land or personal property.

The court ruled that the constitutional issue of whether Congress has the power to impose the tax was determined by how the penalty actually operated rather than by what it was called.

Understanding the Medicaid extension

The court determined that the federal government cannot withhold existing federal Medicaid funding to force a state to extend Medicaid coverage to individuals whose income is less than 133 percent of applicable federal poverty levels. This extension so greatly exceeds the original parameters of the Medicaid program that states could not be considered to have voluntarily agreed to it at the time they agreed to participate in the Medicaid program.

However, the Medicaid provision can simply be severed from the remainder of the healthcare legislation.

Facing the new 2013 taxes

As a result of the Supreme Court's decision, taxpayers with modified adjusted gross income above $200,000, or $250,000 on a joint return, will be subject to two additional taxes beginning in 2013:

  1. A new 0.9 percent hospital insurance tax will apply to earned income; and
  2. A new 3.8 percent unearned income Medicare contribution tax will apply to investment income.
 
Search
© 2017 Apex CPAs & Consultants, Inc.   |   1652 E. Main Street, Suite 100, Saint Charles, Illinois 60174  |   Tel 630.584.4555
Admin   |   Upload Docs  |   Client Login