December 28, 2009

It seems to me that the average taxpayer will be paying a sizable increase in federal taxes to prevent higher cost for health insurance. The Senate's passage on Christmas eve of the Patient Protection and Affordable Care Act sets the stage for the next difficult hurdle in passage of comprehensive health reform legislation: reconciliation of the Senate bill with the House passed version of health reform: the Affordable Health Care For America Act. Just like the House-passed version, there are numerous tax provisions which generate the revenue to cover the cost of the bill.

Here are some key revenue provisions in the Senate-passed health reform bill which I thought may impact you:

  • An additional 0.9% hospital insurance (HI) tax would apply to wages in excess of $200,000 ($250,000 for joint filers), effective for tax years beginning after 2012.
  • A 40% nondeductible excise tax would apply to health coverage in excess of $8,500 (singles)/$23,000 (families), to be indexed for inflation, with increased thresholds for over age 55 retirees and those in certain high-risk professions (e.g., firefighters, construction and mining workers). The tax would apply for tax years beginning after 2012
  • Employers would have to report the value of health benefits on employees' Form-W-2s, effective for tax years beginning after 2010.
  • For purposes of employer provided health coverage (including health reimbursement accounts (HRAs) and health flexible savings accounts (FSAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs)), the definition of medicine expenses deductible as a medical expense would generally be conformed to the definition for purposes of the itemized deduction for medical expenses. But this change would not apply to doctor prescribed over-the-counter medicine. Thus, the cost of over-the-counter medicine (other than insulin or doctor prescribed medicine) could not be reimbursed through a health FSA or HRA. In addition, the cost of over-the-counter medicines (other than insulin or doctor prescribed medicine) could not be reimbursed on a tax-free basis through an HSA or Archer MSA. These changes would be effective for tax years beginning after 2010.
  • The penalty for nonqualified HSA distributions would be increased from 10% to 20%, effective for disbursements made during tax years beginning after 2010.
  • Allowable contributions to health FSAs in cafeteria plans would be capped at $2,500, effective for tax years beginning after 2010. The dollar amount would be indexed after 2011.
  • The floor beneath itemized medical expense deductions would be raised from 7.5% of adjusted gross income (AGI) to 10%, effective for tax years beginning after 2012. The AGI floor for individuals age 65 and older (and their spouses) would remain unchanged at 7.5% through 2016.
  • A 10% excise tax would apply to indoor tanning services, effective for services performed on or after July 1, 2010.
  • The deduction for expenses allocable to Medicare Part D subsidy would be eliminated, effective for tax years beginning after 2010.
With these tax increases, I hope there is a provision that mandates only a small increase in health insurance premiums each year!

 

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).