Health Care Reform: Two Acts, One Very Big Impact
Wednesday, January 12, 2011
The signing of the Patient Protection and Affordable Care Act (March 23, 2010) and the Health Care and Education Reconciliation Act of 2010 (March 30, 2010, the “Acts”) brings a number of health insurance coverage reforms, health insurance reform and increased taxes and potential fines or penalties. To fully understand the Acts, you need to read two Acts as one.
Expanded coverage and tighter controls over the health care insurance industry come at a cost — a hefty cost. A slew of new or increased taxes and fines are embodied in both acts, while the revenue-related provisions of the acts carry differing effective dates. For example, starting in 2011, the act provides for an annual fee on the branded prescription pharmaceutical industry, and beginning in 2013, medical device manufacturers must pay a 2.3% excise tax on medical device sales.
Who Is Really Paying?
While some of the revenue generators are aimed directly at the medical and insurance industry, high-income individuals will fund a substantial part of the cost. For the first time since the creation of Medicare, unearned or nonwage income will be taxed to fund health care. Starting in 2013, there will be a 3.8% tax on investment income for families making more than $250,000 per year ($200,000 for all others). Distributions from qualified retirement plans are excluded from the definition of investment income.
Also starting in 2013, there will be an increase in the employee portion of the Hospital Insurance tax (HI tax). Currently, the HI tax is 2.90% split 50/50 between employer and employee. Beginning in 2013, the employee is responsible for an additional 0.9% HI tax on wages exceeding a threshold amount of $250,000 for married filing jointly ($200,000 for single taxpayers). The threshold amount is not indexed for inflation, so the tax base is expected to increase.
Other sources of revenue are not related to new taxes or tax increases. Some provisions of the Acts are designed to increase the tax base by limiting deductions or pretax contributions to qualified plans. For example, the itemized deduction threshold will increase from 7.5% to 10% in 2013, except in the years 2013 to 2016. If either the taxpayer or the taxpayer’s spouse turns 65 before the end of the tax year, the increased threshold does not apply, and the threshold remains at 7.5% of AGI.
Bush-Era Tax Cuts
Unfortunately, increased taxes from the Acts are not the most immediate concern of individual taxpayers in the top brackets. Instead the Bush-era tax cuts, which are set to expire at the end of 2010, predominate most peoples’ thoughts. If Congress fails to act, the rates currently in effect will increase. Capital gains will go from 15% to 20%, dividends will rise to 39.6% from 15% and the highest tax bracket for individuals will increase from 35% to 39.6%. At the time of writing this article, it seems evident that President Obama, most democrats and virtually all Republicans have agreed that the Bush tax cuts will stay in place at least for the next two years. However, the estate tax issues seem to be in flux.
Once the dust settles from the Bush tax cuts, and as 2012 approaches, individual tax cuts will once again likely be on the forefront of everyone’s mind. Then, as 2013 approaches, individuals will need to be mindful of the health care-related tax provisions and plot tax-planning strategies to minimize individual taxes. There are no one-size-fits-all planning opportunities. Too many variables dictate what opportunities exist, so reconsider the effect of the 2013 Act once the final impact of the Bush tax cuts are clear.
Gregg Kosterlitzky is a tax partner with Padgett Stratemann & Co. He has a broad range of federal and state tax planning expertise, including mergers and acquisitions, dispositions, financings and partnership transactions.
For more information, visit www.padgett-cpa.com or call (512) 476-0717.
MD News January/February 2011, Austin