Your Tax Question - 045 (Part A)

Dear John, I have been hearing all sorts of stories about tax implications of the new Health Care Bill. Can you tell me about what is official and what is hog's-swallow? Thanks, Byron.

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Hi Byron,

There is certainly a lot of speculation about the new 2010 Health Care Act. Before I try to explain what I know, let me clarify that my information is current as of this moment (11/9/2010). Congress has gone on recess and tthey are expected to return before the end of the year to massage the detail. However, that is the nature of taxes, it is only ever current FOR NOW. With that stated, let me details some of the items of interest.

On March 23, 2010 Congress passed, and the President signed into law, new legislation dealing with health care, consisting of H.R. 3590, the Patient Protection and Affordable Care Act and H.R. 4872, the Health Care and then the Education Reconciliation Act of 2010 (Reconciliation Act on March 30, 2010). The most important part of the new health reform law act seems to be the mandate for most U.S. residents to obtain health insurance. This mandate carries with it many new TAX RULES such as:

1. Penalties for individuals who choose to remain uninsured,

2. Tax credits for participating in new insurance coverages,

3. Penalties for larger employers that do not provide insurance (or provide coverage deemed

inadequate or unaffordable),

5. A voucher system for certain lower income employees who choose not to be covered by the

company health plan, and

6. The definition of who is a dependent for an employer health plan (and other purposes) has been expanded.

This Health Care Act is paid for with taxes, penalties and tougher rules for health care related exclusions and deductions. Without getting too political, this legislation could have easily been called the "Tax The Hell Out Of'm Act" to be more to the point. I won't go into too many details but in summary some of the new provisions include:

1. Surtax on “Cadillac” employer health plans,

2. Increased Medicare Tax for higher income individuals,

3. New Medicare Tax on unearned income for higher income individuals,

4. New 10% AGI for deducting medical expenses,

5. New limits on FSA contributions under cafeteria plans,

6. Limits on executive compensation deduction for insurance providers,

7. Annual fees for pharmaceutical companies, manufacturers and importers of medical devices,

and health insurance providers,

8. Codification of the Economic Substance Doctrine and imposition of new penalties,

9. Information reporting for payments to corporations,

10. Eliminating the credit for “black liquor,” and

11. Estimated tax changes for large corporations.

This Health Care Act legislation also creates a few new benefits:

1. A “simple” cafeteria plan for small businesses,

2. Increases the adoption credit and adoption assistance,

3. Creates a new tax credit to stimulate new therapeutic discovery projects, and

4. Provides a new exclusion for certain health professionals.

Of course, all of this is implemented on a timeline that extends into 2018 so how all of it will pan-out has yet to be worked out. So this post doesn't get too cumbersome I will add more details in subsequent posts but for now I just wanted to give you an overview.

Best,

John

P.S. A prof once told me that everything I write has been lifted from someone, the point is to avoid plagiarism and give credit where credit is due. So I would like to credit the UMTax program and the materials that they provide for the information that I know (or at least think I know).