How many Californians paid the healthcare tax in 2013? Was it enough to impact the housing market?
Critics of taxes
Back in 2012, when the Affordable Care Act (ACA) made its stamp on the U.S. tax code, critics were livid. They foresaw doomsday scenarios in which taxpayers of all stripes paid 4%-5% more in taxes than they had in previous years. In the minds of detractors, our fragile economy was unable to handle additional taxes without suffering in equal measure.
The new taxes took effect in 2013. Two years later, that 2013 data is available for us to analyze. While the single year of 2013 isn’t enough to make any definitive statements about the additional taxes, we can report on how many Californians paid the taxes and the amounts paid.
Healthcare tax imagined
The Affordable Care Act added:
- a 3.8% tax on net investment income and profits(classified as unearned income) when modified adjustable gross income (AGI) exceeds a threshold of $250,000 for joint filers (or $200,000 for single filers); and
- an additional 0.9% self-employment Medicare tax onearned income exceeding $250,000 for joint filers (or $200,000 for single filers).
These additions went into effect for the 2013 taxable year.
Net investment income for real estate investors is income, profits and losses from:
- operations and sales of rental property (passive income category assets); and
- interest income on savings and trust deed notes, earnings on land held for profit and rents received on triple net leasedproperty (portfolio income category assets).
On the other hand, earned income is defined as income resulting from trade or business operations and subject to self-employment taxes. This includes the base 2.9% Medicare tax and the additional 0.9% surtax added by the ACA.
The net investment income healthcare surtax formula is 3.8% on the lesser of:
- net investment income; or
- modified AGI in excess of the $250,000 threshold amount for joint filers ($200,000 for single filers). [26 United States Code §1411(a)(1)]
Thus, even if AGI exceeds net investment income, net investment income is the only income subject to the 3.8% surtax — not earned income, and then only to the extent AGI exceeds the threshold.
If AGI is below the set threshold, the 3.8% investment tax does not apply. Likewise, if AGI is solely from earned income like salary or wages, it is not subject to the 3.8% investment income tax.
Healthcare tax actualized
In 2012, first tuesday estimated less than 3.5% of California taxpayers will end up paying additional taxes due to the ACA. How did this estimate pan out?
There were two ways this may have gone. First, the concern of many critics was that too many taxpayers would end up paying additional taxes, and in prohibitive amounts.
Second, a worry from the other end was that taxpayers would find ways to get around paying the additional taxes. One way they might do this is by under reporting income. If this had occurred, taxpayers reporting AGIs over the $200,000/$250,000 threshold would have dipped in 2012-2013.
Did either of these situations happen?
Before the ACA tax was instituted, in 2012, there were 802,700 returns in California reporting at least $200,000 in AGI — 4.7% of all returns. If people were dodging the new tax laws by under reporting, this number would have decreased.
However, in 2013 there were 871,300 returns in the state reporting at least $200,000 AGI — 5% of all California returns. You’ll recall that the bottom threshold for paying the additional tax is $200,000 for single filers and $250,000 for joint filers. Since the number of taxpayers reporting income higher than $200,000 has in fact increased, it doesn’t appear that people are under reporting income to avoid the additional tax.
Of the 871,300 California tax returns reporting at least $200,000 AGI, 448,000 paid an additional Medicare tax — 2.6% of all tax returns. 484,400 paid tax on net investment income — 2.8% of all tax returns. Many of these returns overlap, meaning the average tax return reporting over $200,000 in AGI paid both the 3.8% tax on investment income and the 0.9% tax on earned income.
The additional tax on Medicare and net investment income was paid out as follows:
- taxpayers reporting AGIs of $200,000-$500,000 paid an average $1,021 per tax return;
- taxpayers reporting AGIs of $500,000-$1 million paid an average $7,678 per tax return; and
- taxpayers reporting AGIs of at least $1 million paid an average $55,483 per tax return.
Taken all together, the average taxpayer with an AGI of at least $200,000 paid $5,955 in additional taxes due to the ACA in 2013.
Editor’s note — A small number of taxpayers reporting AGIs below $200,000 paid additional taxes on net investment income and to cover Medicare. These individuals may have had earned income above the $200,000/$250,000 threshold, which required them to pay the 0.9% Medicare tax.
Further, the taxpayer may have had tax-exempt foreign earned income, which increased their modified AGI above the threshold, but does not show up as regular AGI. [26 USC §911(a)(1)]
The effect on California’s economy
Less than 3% of taxpayers paid additional taxes due to the ACA in 2013. Thus, 97% of California taxpayers were unaffected, tax-wise. Let’s take a look at that 97%. According to the U.S. Census:
- The median household income in California is $61,100 as of 2013, well below the threshold for paying healthcare taxes.
- 16% of Californians live below the official poverty line.
- When housing costs and other costs of living are considered, 23% are living in poverty, the highest in the nation.
- 21% of children under 18 are living in poverty.
- 5% of all California residents are without health insurance coverage as of 2014, down significantly from 18% without coverage in 2012.
All of this data points to financial improvement for significantly more Californians.
Increased access to health insurance has decreased the end cost of healthcare for California’s residents. (The term end cost affirms that an individual is more likely to seek preventative care when they have access to health insurance, rather than wait and end up paying an enormous emergency room bill. Therefore, the month-to-month cost of healthcare may have increased for some, but in the end, exorbitant emergency bills are more often avoided, thus bringing the total cost for individuals previously without insurance down).
Detractors may point to the fact that total healthcare costs, including health insurance premiums, have actually increased since the ACA, thus eliminating the benefits access to health insurance has provided for those previously unable to afford it. They are correct; the total amount spent on healthcare in the U.S. has increased — but not so fast.
The ACA was signed into law in 2010 (taxes didn’t begin until the 2013 tax year). From 2010-2013, healthcare costs continued to increase, as they do every year. However, the increase was smaller than previous years:
Image courtesy: WhiteHouse.gov
In 2013, healthcare costs rose by 3.6%, or 1.4% when accounting for inflation (as seen in the chart above). 2010-2013 experienced the lowest rates of increase since recordkeeping on this topic began in 1960. This is due in part to economic slowdown and in part to provisions in the ACA which address inefficient healthcare systems in place.
Therefore, at the end of the year, more Californians are ultimately left with more money in their bank account than without the ACA. True, a small percentage of residents (less then 3%) are funding this via increased taxes. However, given the average income of those paying the healthcare taxes is well over $400,000, the average additional tax payment equals about 1% of their total annual income.
Further, when people have more money in their wallets (the 97% who primarily benefit from the tax via access to cheaper healthcare and no additional taxes), they spend it. Thus, the economy performs better and the top 3% of earners who do pay the additional tax likewise benefit from an improved economy.
A more stable and growing economy adds support to California’s recovering homeownership rate. 54% of California households own the home in which they reside as of the third quarter of 2015, significantly below the U.S. average homeownership rate of 64%. Given California’s high level of poverty and high cost of living, it’s no surprise qualifying to buy a home and then maintain it is so difficult in the Golden State.
Policies that allow the majority of Californians to hold onto more of their money are only going to help the housing market — not harm it.