First: The Individual Mandate Tax (formerly known as a penalty). This provision will require a couple to pay the higher of wither a base tax of $1,360 per year, or 2.5% of adjusted their growth income starting with lower base tax and rising to this level by 2016. Individuals will see a base tax of $695 and families a base tax of $2,085 per year by 2016.
Second: Medicine Cabinet Tax that already took effect in 2011. This tax is directed to those who deduct their pharmaceutical expenses while filing, as this tax prohibits reimbursement of expenses for over-the-counter medicine, with the lone exception of insulin, from an employee’s pre-tax dollar funded Health Saving Account (HSA), Flexible Spending Account (FSA) or Health Reimbursement Account (HRA). This provision hurts middle class earners particularly hard since they earn enough to actually pay federal taxes, but not enough to make this restriction negligible.
Third: The Flexible Spending Account (FSA) Cap, which begin this year, is perhaps the most hurtful provision to the middle class. This part of the law imposes a cap of $2,500 per year (previously it was unlimited) on the amount of pre-tax dollars that could be deposited into these accounts. A particularly hurtful example of this harming a middle class family is a case of funds in these accounts being used to pay for special needs education for children. Tuition rates for this type of special education can easily exceed $14,000 per year and the use of pre-tax dollars has helped many middle income families.
Fourth: Medical Itemized Deduction Minimum, which is currently 7.5% of adjusted gross income. This is the hurdle that must be met before medical expenses over this hurdle can be taken as a deduction on federal income taxes. Obamacare raises this hurdle to 10% of adjusted gross income beginning in 2013. Consider the middle class family with $80,000 of adjusted gross income and $8,000 of medical expenses. Currently, that family can get some relief from being able to take a $2,000 deduction (7.5% X $80,000 = $6,000; $8,000 –$6,000 = $2,000). An increase to 10% would eliminate the deduction in this example and if that family was paying a 25% federal tax rate, the real cost of that lost deduction would be $500.
Fifth: Health Savings Account (HSA) Withdrawal Tax Hike. Continuing the trend of undoing all the benefits given to people trying to control their health costs over the past 10 years using a Health Savings Account, this provision increases the additional tax on non-medical early withdrawals from an HSA from 10% currently to 20% beginning in 2013. This provision actually sets these accounts apart from Investment Retirement Accounts (IRAs) and other tax advantaged accounts, all of which remain with a 10% early withdrawal tax.
Sixth: Indoor Tanning Services Tax, this tax began in 2010, and it places a 10% excise tax on people using tanning salons. While some may regard this as insignificant, the broader implication is that this act of taxation is a blatant move by the federal government to control the behavior of citizens. This provision, as does the Individual Mandate and as Justice Kennedy said during the oral arguments on the constitutionality of the law said, “….fundamentally changes the relationship between the federal government and the citizen.”
Seventh: Excise Tax on Comprehensive Health Insurance Plans or the “Cadillac” Health Insurance Plan Tax. These are plans that provide extensive coverage and that are generally fully paid for, or largely paid for, by employers. This provision imposes a 40% excise tax on the employer-paid premium on taxpayers who are covered by such plans, beginning in 2018. The reason it begins in 2018 is because most unionized workers are covered by plans that fall under this definition and a deferral was made to spare union members from this tax for at least a period of time.
Eighth: Payroll Tax Holiday Over, In late 2010, Congress passed a law stating that the Social Security portion of your payroll taxes went from 6.2% to 4.2%, a 2% reduction. As of January 1st, that 'holiday' was over, and the fiscal cliff deal did not extend it.
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