Health Care Reform – How it Will Affect Our Taxes
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Health care reform doesn’t come cheap. How do we pay for it? More and increased taxes, of course, both this year and in future years, along with certain credits for health insurance premium costs. This is an outline of the many tax law changes as a result of the new health care laws, organized by affected parties and implementation date:
Individuals:
· Starting in 2011
o Over-the-counter medications are no longer qualified expensesfor Flexible Spending Accounts, Health Savings Accounts, or health reimbursement arrangements
o 20% penalty for nonqualified distributions from Health Savings Accounts, up from 10%
Starting in 2013
o A new 0.9% Medicare Payroll Surtax will apply to wages and non-corporate business profits over $200,000 for single taxpayers and $250,000 for married couples filing jointly
o A new 3.8% Surtax on Investment Income of high earners. The levy will apply to the lesser of:
§ (1) “Net Investment Income,” OR
§ (2) The excess of “Modified Adjusted Gross Income” (MAGI) over the “threshold amount”
§ Net Investment Income includes:
· Interest
· Dividends
· Capital Gains
· Annuity Payments
· Rents
· Royalties
· Passive activity income
· Income from Roth IRA Rollover
§ Net Investment Income does not include:
· Tax-exempt interest
· Active trade or business income (including the items above if derived from the active trade or business)
· Distributions from IRAs or other qualified retirement plan accounts
· Self-employment income
· Gain on sale of an active interest in a partnership or S corporation in excess of the net gain that would be recognized if all of the partnership or S corporation interests were at fair market value
· Note: these items do increase MAGI, however
§ Modified Adjusted Gross Income is the sum of Adjusted Gross Income (AGI) (line 37, Form 1040) and the net foreign income exclusion amount
§ Threshold Amount
· Married taxpayers filing jointly – $250,000
· Married taxpayers filing separately – $125,000
· All other individual taxpayers – $200,000
· Trusts and Estates – $11,350
o A $2,500 annual limit on the amount that employees can contribute to health care Flexible Spending Accounts. This was previously left to the employer’s discretion, with many companies choosing a limit of $4,000 to $5,000 or so.
o A 10% floor on itemized deductions for medical expenses (up from 7.5%). Individuals age 65 and over are exempt through 2016.
· Starting in 2014
o Individual Mandate – a new tax on individuals who do not obtain adequate health coverage (citizens and legal immigrants).The tax is to be phased in over three years:
§ 2014 – the greater of $95, or 1% of taxable income
§ 2015 – the greater of $325, or 2% of taxable income
§ 2016 – the greater of $695, or 2.5% of gross income
§ Subsequent years – increased by cost of living adjustment
§ Families of three or more will pay the greater of the percentage of income, or three times the individual penalty amount. The maximum penalty is equal to the amount the individual or family would have paid for the lowest cost “Bronze” plan (the minimum coverage) minus any allowable subsidy
§ Exemptions include:
· Persons not required to file tax returns
· Persons for whom the lowest cost plan exceeds 8% of his/her income
o Premium Subsidies – a refundable, advanceable premium tax credit to help low-income taxpayers purchase health insurance coverage
§ Household income must be no more than 400% of the federal poverty level:
· $43,320 for one person
· $58,280 for two persons
· $73,240 for three persons
· $88,200 for four persons
§ The credit is a sliding scale, based on income. At the lowest income level, there is a credit for all costs. As income increases, the credit phases out.
§ Note: North Carolina’s median household income in 2008 was $46,574 (average household was 2.5 persons)
§ Individuals who are covered by certain plans or programs are generally ineligible:
· Employer-based coverage
· TRICARE
· Veterans Administration
· Medicaid
· Medicare
o Health Insurance Exchange – each state must establish a health insurance exchange — a marketplace where individuals, the self-employed and small businesses can buy health insurance coverage. The government-regulated exchanges will offer insurance policies with different levels of coverage and cost.
Businesses/Employers:
· Starting in 2010
o Employers with 25 or fewer employees and average annual wages of no more than $50,000 are eligible for a tax credit:
§ 35% credit is available for for-profit employers that provide health insurance coverage and pay a minimum of 50% of the total premium cost
§ Full credit is available only for employers with 10 or fewer employees and average annual wages of no more than $25,000
§ Credit decreases as number of employees and average wages increase
§ Non-profit employers are limited to a 25% credit
§ Above rules through 2013
§ In 2014-15
· Maximum credit is 50%
· 35% for non-profits
· Only available for insurance coverage purchased through the Health Insurance Exchange
o New Form 1099 filing requirements:
§ Payments to corporations are no longer automatically exempt
§ Required for amounts paid in consideration for property or other “gross proceeds”
§ Filing threshold is $600 – same since IRC 1954
§ Purpose is to increase revenue due increased reporting of income
§ This requirement has been largely ignored and may be repealed. The AICPA is in favor of repeal.
· Starting in 2012
o A requirement that businesses include the full value of the health care benefits they provide to employees on Forms W-2
§ Health Insurance – employer and employee shares
§ Contributions to FSAs
o The amount reported is not considered taxable income
o Note: This was originally required beginning with W-2s for 2011 (those issued early in 2012), but in October 2010, a one-year delay was implemented. Employers may voluntarily report the value of health benefits they provide on 2011 W-2s, but this will not be mandatory until the 2012 forms.
· Starting in 2013
o Elimination of a deduction employers now take for providing Medicare Part D prescription drug coverage to their retirees to the extent that the federal government subsidizes the coverage
· Starting in 2014
o Health Insurance Exchange – each state must establish a health insurance exchange — a marketplace where individuals, the self-employed and small businesses can buy health insurance coverage. The government-regulated exchanges will offer insurance policies with different levels of coverage and cost
o Penalties for failure to provide coverage – for businesses with 50 or more full-time employees
§ Affordable coverage must be offered to employees and dependents
§ Waiting period for coverage must not exceed 90 days
§ Employers are not required to pay any part of the premium
§ Penalty for not offering coverage
· $2,000 per full-time employee (dependents not included)
· First 30 employees excluded
· If an employer does offer coverage, but at least one full-time employee qualifies for and receives a subsidy, then $3,000 is due for any full-time employee who receives a subsidy (excluding the first 30 employees)
· Determined on a monthly basis
· Non-deductible for tax purposes
Starting in 2018
o A new 40% excise tax on high-cost health plans, levied on the portion that exceeds $10,200 in value for individuals and $27,500 for families. The limitations will increase by inflation plus 1%. The provision is aimed mostly at “Cadillac” plans offered by employers, although it can affect individual policies
Businesses/Specific Industries:
· Starting in 2010
o A new 10% excise tax on Indoor Tanning Servicesbegan July 1, 2010
· Starting in 2011
o A new annual fee (gross tax) on Prescription Drug Manufacturers – $2.5 billion
§ Applies to branded prescription manufacturers and importers
§ Apportioned by market share
§ Non-deductible
§ First $5 million exempt
§ In 2018, increases to $4.1 billion
§ In 2019, decreases to $2.8 billion
· Starting in 2013
o A new 2.3% excise tax on Medical Devices sold in the United States
o Definition of medical device from the Federal Food, Drug and Cosmetic Act:“…an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part or accessory which is (1) recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them, (2) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other animals, or (3) intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes.”
o Commodity items like band-aids not included
