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If the bill isn’t repealed, the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!
Philip Klein: The Supreme Court’s Obamacare ruling — abridged