Flickr image of “The Ultimate Swiss Army Knife” by redjar
The Supreme Court surprised just about everybody today by holding that the Affordable Care Act was not a permitted exercise of C ongressional Commerce Clause power, but it was still valid as a tax. That means the Act remains in place unless the other two branches pass a repeal. As a practical matter, then, nothing changes. All of the new taxes and penalties — oops, it’s all taxes now — will take effect as scheduled.
The most important of these from a tax planning point of view may be the Act’s 3.8% tax on “unearned” income. This tax will apply to interest, dividends, rents and capital gains starting in 2013 for taxpayers with AGI over $250,000. It also applies to “passive” income from pass-through trades or businesses. Examples will include inactive family owners in a family business. The law applies the “passive loss” rules in determining whether the 3.8% tax applies. This will incentivize owners of profitable businesses to claim they are “materially participating” in the business. Up to now, such taxpayers often didn’t have to take a stand on whether they were passive, as long as the business was profitable. Look for a lot of family members with big K-1s to start pulling down W-2 income where they never had done so, to bolster their case for being non-passive.
There is also a .9% additional surtax on salary income and self-employment income when wages exceed $250,000 on a joint return ($200,000 single). This will increase the attraction of using S corporations and keeping the salary below these thresholds, sending out the rest of the income on the K-1 free from these penalties.
If the bill isn’t repealed, the penalty tax on individuals who fail to buy health insurance will take effect in 2014. For the first year it applies at the greater of a laughably small $95 per year in 2014, or, if greater, 1% of “household income” — the aggregate incomes of all members of the household required to file tax returns. That will rise to $695 per year by 2016 or 2.5% of household income, if greater, by 2016. Strangely, the IRS can’t collect this tax without the taxpayer’s help. If the taxpayer doesn’t fork it over voluntarily, or have a refund against which to apply it, the IRS can’t use its collection tools — levies, seizures and so on — to collect it. That means a lot of people will make sure to fiddle their W-4s so they never have an overpayment on their 1040s.
Maybe the most depressing aspect of the decision is the way it seems to endorse using the tax law as the Swiss Army Knife of public policy. Things that Congress can’t enact any other way are now possible if they can somehow be crammed into the tax law. The tax code is already groaning under its load of responsibilities for industrial policy, health policy, welfare policy and housing policy, for starters. The IRS Commissioner is now sort of a super cabinet member with a portfolio that dwarfs most of the “real” cabinet departments. Of course, the IRS is ill-suited to this role, resulting in poor policy administration and poor tax administration. Thanks, Justice Roberts!
Related:
Tax Policy Blog: Supreme Court Problematically Defines Individual Mandate as “Tax” and Roundup of Reactions to Supreme Court Health Care Ruling
Althouse: Chief Justice Roberts writes an opinion limiting the commerce power and the spending power.
Philip Klein: The Supreme Court’s Obamacare ruling — abridged
Tags: ACA, Althouse, Obamacare, tax administration, tax policy, Tax Policy Blog
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Check your facts. Its not $95/$695 per month…its per year.
Thanks. Fixed.
Source for the $95 per month penalty? Since it seems like half of the web says that is the annual limit and the other half says it is a monthly amount. If it is monthly, is the 1% per month as well? Or the annual limit?
Annual. Brain lapse. Fixed in post now. It applies an a monthly basis for months without coverage, but for 1/12 of the amounts listed per month.
I’m waiting for the day for Obama to say that I have to buy a car from Government Motors, as permitted under Congress’s authority to tax.
[...] Plus this from Joe Kristan: [...]
Woody, you already DO pay more tax if you don’t by a government approved (i.e. electric) car. If you buy one, you get a refund. Therefore, if you don’t buy one, you pay more tax.
I dont buy this roberts master plan business. Precedents are meaningless unless they are actually applied to a law. If roberts really wanted his commerce clause restrictions to mean something, he would have honestly applied it to the mandate and struck it down. As it is, the only precedents he did set are all undesireable ones, like the following:
1. While there may be limits someday on the commerce power, the federal taxing power is now completely unlimited. The fed gov can tell you do do anything they want, by taxing you high enough if you dont do it.
2. And the lawmakers dont even have to call these taxes taxes, they can still call them mandates and penalties, to avoid taking the political heat for a tax hike. Then when they come before the court, Roberts will rewrite the legislation, usurping the job of congress, to magically transform your illegal penalty and mandate, into a legal tax. Then after the decision, you can ignore Roberts, having had him already do what you wanted, and still call them penalties and mandates (Pelosi just did that today, when she was asked whether the bill had a tax hike).
3. The leftist campaign to intimidate the court worked, Roberts caved, and gave them the law they wanted. Cowardly cave ins of this type do not “bolster the legidimacy of the court” they undermine it. The only way to really bolster the legidimacy of the court is to honestly apply the law, which roberts, in majically transforming an illegal mandate into a legal tax, did not do. And now the leftists know the court can be successfully bullied, and will be even worse in the future.
The only good side effect of this craven betrayal is we now know that we cannot rely on the court to protect our freedoms, only we the people can, by joining the tea party, and throwing out all the rascals that are usurping our freedoms, starting with obama and the dem senate. And if after the repubs take the presidency and senate, they still do not repeal this abomidable law, we throw them out too.
[...] Joe Kristan (Roth & Co.): Maybe the most depressing aspect of the decision is the way it seems to endorse using the tax law as the Swiss Army Knife of public policy. Things that Congress can’t enact any other way are now possible if they can somehow be crammed into the tax law. The tax code is already groaning under its load of responsibilities for industrial policy, health policy, welfare policy and housing policy, for starters. The IRS Commissioner is now sort of a super cabinet member with a portfolio that dwarfs most of the “real” cabinet departments. Of course, the IRS is ill-suited to this role, resulting in poor policy administration and poor tax administration. Thanks, Justice Roberts! [...]
[...] Joe Kristan (Roth & Co.): Maybe the most depressing aspect of the decision is the way it seems to endorse using the tax law as the Swiss Army Knife of public policy. Things that Congress can’t enact any other way are now possible if they can somehow be crammed into the tax law. The tax code is already groaning under its load of responsibilities for industrial policy, health policy, welfare policy and housing policy, for starters. The IRS Commissioner is now sort of a super cabinet member with a portfolio that dwarfs most of the “real” cabinet departments. Of course, the IRS is ill-suited to this role, resulting in poor policy administration and poor tax administration. Thanks, Justice Roberts! [...]
[...] Related: Obamacare: it’s a tax! [...]