Irrespective of your opinion of the health care reform bill signed into law by President Obama in March of 2010, you can be sure of one thing: your taxes will be affected in some manner. A bill of this magnitude and complexity comes with good and bad news, in varying measure depending on your financial status, but we can all expect a mix of both. For starters, there are a host of new taxes, fees, and penalties coming down the pipeline. Some went to work immediately with the passing of the law. Others will become effective this year or at some point during the remainder of the decade. There are also a number of important tax breaks for individuals and small businesses, but they come coupled with new reporting requirements that will impact the way you file your taxes.
Remember that some of the finer details of the bill are in potential flux as legal challenges regarding the law’s validity are mounted by various factions across the political spectrum. In fact, the expectation is now fully in place that the crux of the matter will ultimately end up being decided by the Supreme Court. The bone of legal contention concerns the so-called individual mandate, which is to say the binding requirement for each individual to obtain adequate health coverage thereby contributing to the risk pool that is central to the bill’s workability in its present form. Failure to do so would incur a new tax. It is as good, or bad, a place as any to begin our unpacking of the tax related issues involved with the health care reform bill of 2010.
- Individuals who do not purchase satisfactory health care coverage will have to pay a new tax, proverbially called the individual mandate tax but strictly a penalty, beginning in 2014. It starts that year at $95 for an individual, or 1% of income, whichever is largest, and is increased to $695, or 2½% of income, by 2016. For a family, this figure is $2085.
- In conjunction, firms of 50 or more employees who do not offer coverage will be taxed a non-deductible fee equal to $2000 per worker but not counting the first 30 workers.
Much of the burden of the law will fall squarely, and unsurprisingly, on the broad shoulders of the wealthiest among us. If you belong to that blessed demographic, you want to pay special attention to the following:
- Beginning in 2013, a 0.9% Medicare surtax will apply to wages in excess of $200,000 for single individuals and $250,000 for married couples filing jointly.
- That same year, high earners, as specified by the wage figures stated above, will have their investment incomes levied with a 3/8% Medicare tax on the following basis: the lesser of their unearned income or the amount above the $200k and $250K threshold amounts of their adjusted gross income. Unearned income includes interest, dividends, annuities, rents, and capital gains, for example in the shape of profit made from the sale of your house. If it is your intention to do so, you might want to complete the transaction prior to the end of 2012 to avoid this new tax. It could also benefit you to proceed with those home improvements that you have put off as a shortcut to lowering your capital gains by raising the cost basis of your home.
- It is important to note that these two new taxes will be applied independently of each other, which is to say that avoiding the one does not entail that you could escape the other. For example, a couple with combined earnings of $245,000 and capital gains of $45,000 whose modified adjusted gross income clocked in at $260,000 would not be penalized with the 0.9% tax but would still be liable for the 0.375% Medicare tax on the ten grand by which their MAGI went above the $250,000 ceiling. Needless to say, some people will end up owing on both taxes.
- Beginning in 2018, a new 40% excise tax will be levied on so-called “Cadillac” or “gold-plated” high cost health care plans, specifically on the share exceeding $10,200 for individuals and $27,500 for families.
The moneyed can perhaps take solace from the repeal of the so-called “botax”. This 5% tax on cosmetic surgery that was part of the initial bill and included Botox injections among other “beautifying” procedures has now been replaced by a new tax on tanning services. Indeed, beginning in July of 2010, a 10% excise tax is now levied on tanning salons, thereby affecting the 30 million Americans, near a full percentage point of them teenagers, who hit the tanning beds yearly for that boost of vitamin D. The rich, who can presumably afford to travel to exotic locales for their dosage of the essential nutrient, will not be affected.
New Penalties, Threshold, Eliminations
The health care reform bill comes packaged with new tax penalties and caps on benefits. In addition, certain subsidies and deductions are or will soon be permanently rescinded. For instance,
- The Medicare Prescription Drug Plan (Medicare Part D) deduction extended by employers to retirees, to the extent that it is subsidized by the federal government, will be eliminated in 2013.
- Nonqualified distribution from health savings accounts (HSAs), which is to say using funds from the account for non-health care related expenses such as a laptop, bike, etc, will get slapped with a harsher penalty starting in 2011. It will be increased from 10% to 20% of the amount distributed. Please note that non-eligible distributions are also fully taxable.
- The use of funds from HSAs, healthcare flexible spending accounts (FSAs), or health reimbursement arrangements (HRAs) for the purchase of over the counter medication will be prohibited beginning 2011.
- Healthcare flexible spending accounts (FSAs), traditionally established by an employer to enable employees to pay for certain eligible medical and dependent care expenses with pre-tax dollars, will be capped at $2500 a year. Hitherto, employers have had complete flexibility as to the amount involved. Starting in 2013, this will no longer be allowed.
- Starting in 2013 for individuals under 65 years old, the floor on itemized deductions for out of pocket medical expenses is moved up from 7½% to 10%. This percentage is the amount of a taxpayer’s adjusted gross income which medical expenses must exceed to qualify for the deduction. In short, taking advantage of the medical expense deduction will soon be made even more difficult. For those above 65, the change becomes effective after 2016.
New Information-reporting Requirements for Businesses
The health care reform bill saddles businesses with new, tax related requirements. The first stipulation listed below looks well on its way to being made permanent. The second provision seems headed for repeal although the matter is still under study in the House.
- Businesses are now required to state the value of the health care coverage on their employees’ W-2. This requirement is optional in 2011 but will become mandatory next year. The stated amount is not taxable.
- Businesses are also required to file a 1099 tax form establishing the identity of any vendor, supplier, or contractor to whom they paid at least $600 for goods, merchandise, and services during the year. In addition, copies of the 1099 forms will need to be sent to each and every vendor, supplier, etc.
- Examples of such goods and services include office equipment, food, gasoline, plumbing supplies, travel expenses, telephone and internet service, and so on. Further, annual reports will be required documenting all purchases that exceed the $600 floor and must include each vendor’s address and taxpayer identification number.
Small businesses and their political allies on both sides of the aisle are already bemoaning this potentially expensive new burden and predicting a clerical nightmare. However, the reporting requirement is expected to net $17 billion in revenue over 10 years, and it is likelier that it will be reintroduced in a modified version rather than being cancelled outright.
After all this troubling news, it behooves us to close on a positive note. The health care reform bill does indeed find place for a couple of important tax credits to counterbalance the burden of new taxes, requirements, and penalties. Two groups stand to benefit: small businesses and low-income individuals and families.
- Started in 2010, small firms of either less than 10 employees or less than $25,000 in average pay receive a credit of up to 35% of their health care coverage premiums. The credit would be extended through 2015 and then be eliminated. It would also be gradually phased out as the firm’s number of workers climbed above 10 or its pay above the $25K ceiling. Note that businesses with more than 25 employees (or more than $50,000 in average pay) do not qualify for the credit.
- A refundable credit will be offered following the 2014 enactment of the individual mandate to low income people to encourage the purchase of health care coverage. The rule for eligibility is predicated on the following: annual income of between 100 and 400% of the federal poverty level, which translates roughly to $11,000 and $44,000 for an individual. For couples, these amounts are doubled.
- An important caveat to the above mentioned: the credit is based on a sliding scale depending on income, going from full to partial coverage.
- Effective immediately following the passing of the bill, children can now remain on their parent’s health insurance policy until the age of 26.
The health care reform bill is truly a work in progress. As of February of this year, hundreds of waivers have been requested from the Obama administration by companies, unions, and other institutions to deal with provisions of the law they need time to implement or outright disagree with. Quite a few have been granted, leading to the unsurprising claim from the usual quarters that it is proof the bill’s gross deficiency and valid cause for its repeal. We prefer to reserve judgment. Expect some rules to change, while others become a permanent feature of our lives.