On June 29, 2012 the U.S Supreme Court made a historic decision to uphold most of the Health Care Reform Act passed by Congress in 2010. Much controversy has emerged from Chief Justice John Robert’s opinion that Congress has the power to tax, and provisions under the Act are in reality a tax not a penalty. This distinction has been the subject of such strong debate throughout America, so we’d like to help clarify the difference.
TAX
A tax is a fee imposed by a governmental authority on a product, income or activity. It can be a direct tax, for example income tax imposed directly on personal or business income. Or it can be an indirect tax, such as sales tax on the price of a good or service. The purpose of a tax is to finance government expenditures for the welfare of the people governed. Failure to pay tax is punishable by law.
Sometimes taxes are enacted to promote certain behaviors. You’ve seen recent examples of personal income tax credits for the purchase of homes, higher education expenses, or residential energy tax credits; these behaviors are considered positive for society. On the other hand, a 10% additional tax is generally imposed on a personal income tax return if someone withdraws from their retirement account before the age of 59 ½; this was enacted to encourage to hold off using retirement money until they are older.
PENALTY
A penalty is a punishment levied for violating a law or agreement. We all know about parking and traffic tickets; those are penalties. You will be charged penalties for filing your tax return late, or not paying income tax owed. Penalties are also imposed to discourage undesirable behaviors.
SO WHICH ONE IS IT?
We think it’s purely a matter of semantics. Regardless of political or legal opinion, the Health Care Reform Act remains in effect.
WHAT DOES THE ACTUAL LAW MEAN?
Starting in 2014, most Americans will be required to have health insurance. Taxpayers will be required to indicate on their tax returns whether they have health insurance that meets minimal benefits standards. If consumers do not have insurance by 2014, they would owe $95, or 1 percent of taxable income, whichever is greater. The “tax’’, or if you prefer “penalty”, rises to $325, or 2 percent of taxable income in 2015, and then $695, or 2.5 percent of taxable income in 2016, up to a maximum of $2,085 per family.
2014 is a long time from now, and we don’t think the health care issue is over. The important thing is to know is tax law keeps changing. It’s critical to have an experienced tax professional guide you through unclear issues. Gary Kaplan can help with all your tax planning needs.
