Taxable Talk

So I noted last month (more accurately, noting that Joe Kristan’s comment was completely accurate). We have a new listing of the taxes in the healthcare legislation. The new taxes are noted by italics while taxes that have been removed are noted by strikeout text.

1. Individual Mandate Tax. For those who don’t purchase health insurance, this income tax surcharge will start at $95 $495 (S)/$295 $990 (2)/$1485 (3+) or 0.5% of AGI in 2014 and rise in 2016 and future years to $750 $495/$2250 $990/$1485 or 2% of AGI.

2. Employer Mandate Tax. On businesses with 50+ employees that do not offer health care, and at least one employee qualifies for a tax credit, $750/employee. This will cause many small businesses to stop growing once they reach 49 employees.

There is also a waiting period tax of $400 (if the wait is 30-60 days) or $600 (60+ days). This tax also starts in 2014.

3. Excise Tax on Health Insurance Plans. Beginning in 2013, 40% tax on plans costing $8500/$23,000. Is indexed to CPI. In high premium states such as California, many plans would pay this tax. My health insurance would likely pay this tax…and it’s not a Cadillac plan. There’s a higher threshold for early retirees ($9850/$26,000) and those in “high-risk” professions. Longshoremen are exempt.

4. Health Insurance would be reported on W-2s. Another mandate that increases costs for business.

5. “Medicine Cabinet Tax.” Limitation on HSAs, FSAs, and MSAs to purchase non-prescription medication except insulin. Note that this is also in the House healthcare bill.

6. HSA Withdrawal Tax Increased. The tax would increase to 20% from 10%. This is also in the House legislation.

7. FSAs capped at a maximum of $2500. They are now uncapped.

8. 1099 Reporting for corporations. Requires businesses to send 1099-MISCs to corporations. This is another cost for businesses. This will begin in 2011 and will definitely increase my income.

9. Tax on Charitable Hospitals. This excise tax of $50,000 per hospital impacts hospitals that don’t meet new Department of Health and Human Services regulations.

10. Tax on Drug Companies. The tax would be $2.3 billion based on sales percentage.

11. Tax on Medical Device Manufacturers. The $2 billion tax is also based on sales percentage. It rises to $3 billion in 2017.

12. Tax on Health Insurers. A $6.7 $10 billion tax based on percentage of health insurance premiums collected. It now phases in gradually until 2017.

13. Elimination of tax deduction for employer provided retirement prescription drug coverage.

14. Increase of percentage of AGI required to deduct medical expenses from 7.5% to 10%. Few can deduct medical expenses today; fewer will be able to deduct them tomorrow.

15. Compensation Limitation for Health Insurance Executives. If you work in that industry, you will be limited to a salary of $500,000.

16. Medicare Payroll Tax Hikes. Once your income exceeds $200,000/$250,000 (MFJ), you will pay an additional 0.5% 0.9% tax. Note that the employer will only collect (and be responsible for this tax) if you earn $200,000/$250,000 or more. This also impacts the self-employed. And the law is written so that the self-employed cannot deduct half of the new tax as a deduction to income tax.

17. Blue Cross Tax. There is a tax deduction available today for Blue Cross and Blue Shield companies; this tax deduction will vanish if they don’t spend 85% (or more) of premiums on clinical services.

18. Excise Tax on Cosmetic Medical Procedures. A new 5% excise tax on these procedures.

18. Tax on Indoor Tanning. A new 10% excise tax on indoor tanning salons.

This is bad legislation, unwieldy, probably unconstitutional, and will hurt us all. So of course there’s a rush to pass it….

There is no free lunch. If the government provides us a benefit, it’s really we who provide that benefit. It’s our government, and the money that it’s giving us is our own, whether that money is borrowed or comes from tax receipts.

The health care legislation that appears likely to pass the Senate is such a bill. The legislation, which runs at least 2000 pages, contains numerous tax components. The latest change eliminates a tax on cosmetic surgery but adds a tax on indoor tanning. Medicare taxes will be increased on individuals earning more than $200,000 by 0.9%. Those are just two of the taxes in this legislation.

And there are numerous carve-outs and special deals so that the bill could make its way through the Senate. Nebraska won’t have to pay for Medicare; the other states will under this legislation. That deal was so that Ben Nelson, a Democrat who represents a relatively conservative state (Nebraska), would vote for the bill. There are provisions in the legislation that aid Louisiana and Indiana, states that are also relatively conservative and have Democratic Senators.

And what do we get for this? I’m still unsure; it appears to be some sort of mandatory health insurance program. What it will likely be is a lot more work for people like me, and a lot more bureaucracy. And a lot higher taxes. The bill, if it passes, will be passed on a straight party-line vote.

Senator Harry Reid’s (D-NV) healthcare legislation has 18 tax changes according to Americans for Tax Reform. Here’s a list of the taxes and their impacts (note: Dollar figures are single/single 2+ (S2) or MFJ):

1. Individual Mandate Tax. For those who don’t purchase health insurance, this will start at $95/$285 (S2) in 2014 and rise in 2016 and future years to $750/$2250.

2. Employer Mandate Tax. On businesses with 50+ employees that do not offer health care, and at least one employee qualifies for a tax credit, $750/employee. This will cause many small businesses to stop growing once they reach 49 employees.

3. Excise Tax on Health Insurance Plans. Beginning in 2013, 40% tax on plans costing $8500/$23,000. Is indexed to CPI. In high premium states such as California, many plans would pay this tax. My health insurance would likely pay this tax…and it’s not a Cadillac plan.

4. Health Insurance would be reported on W-2s. Another mandate that increases costs for business.

5. “Medicine Cabinet Tax.” Limitation on HSAs, FSAs, and MSAs to purchase non-prescription medication except insulin. Note that this is also in the House healthcare bill.

6. HSA Withdrawal Tax Increased. The tax would increase to 20% from 10%. This is also in the House legislation.

7. FSAs capped at a maximum of $2500. They are now uncapped.

8. 1099 Reporting for corporations. Requires businesses to send 1099-MISCs to corporations. This is another cost for businesses.

9. Tax on Charitable Hospitals. This excise tax of $50,000 per hospital impacts hospitals that don’t meet new Department of Health and Human Services regulations.

10. Tax on Drug Companies. The tax would be $2.3 billion based on sales percentage.

11. Tax on Medical Device Manufacturers. The $2 billion tax is also based on sales percentage.

12. Tax on Health Insurers. A $6.7 billion tax based on percentage of health insurance premiums collected.

13. Elimination of tax deduction for employer provided retirement prescription drug coverage.

14. Increase of percentage of AGI required to deduct medical expenses from 7.5% to 10%. Few can deduct medical expenses today; fewer will be able to deduct them tomorrow.

15. Compensation Limitation for Health Insurance Executives. If you work in that industry, you will be limited to a salary of $500,000.

16. Medicare Payroll Tax Hikes. Once your income exceeds $200,000/$250,000 (MFJ), you will pay an additonal 0.5% tax. Note that the employer will only collect (and be responsible for this tax) if you earn $200,000/$250,000 or more. This also impacts the self-employed. And the law is written so that the self-employed cannot deduct half of the new tax as a deduction to income tax.

17. Blue Cross Tax. There is a tax deduction available today for Blue Cross and Blue Shield companies; this tax deduction will vanish if they don’t spend 85% (or more) of premiums on clinical services.

18. Excise Tax on Cosmetic Medical Procedures. A new 5% excise tax on these procedures.

Remember, all tax increases are passed to consumers. There is no free lunch. If this legislation passes, you and I will be paying more for less.

Additionally, when government takes more, businesses either have to increase prices, cut wages, or do something else to still make a profit. If this legislation passes businesses will cut staffing. That’s basic economics, something sorely lacking in Washington.

Businesses will increase prices, but the law of supply and demand dictates that their revenues will likely decrease because of the higher prices.

I haven’t seen a tax professional speak in favor of this legislation. And I doubt I will; this measure will increase costs for businesses, lead to higher cots for consumers, and will almost certainly lead to a single-payer system. Peversely, this measure would likely lead to more business for me…for all the wrong reasons. As Joe Kristan says, “It’s unpopular, unworkable, and insane, so naturally they’re in a hurry to pass it.” Truer words have never been spoken.

Other coverage:
Roth Tax Updates
Don’t Mess With Taxes
Tax Lawyer’s Blog

The 1990-page health care bill that the House will consider has numerous tax provisions. Americans for Tax Reform published a list of some of the changes:

– Employer Mandate Excise Tax of 0 to 8% of wages (depends on size of business);
– Individual Mandate Surtax of 2.5%;
– Flexible Spending Accounts (FSAs) limited to $2500/year;
– Non-qualified HSA Distributions would be taxed at 20% versus 10% currently;
– Income tax surtax of 5.4% on Modified AGIs over $500,000 single/$1 million MFJ (margin loan interest is not deductible for purposes of this calculation);
– 2.5% excise tax on medical devices;
– 1099s would be required for corporations; and
– “Empowers the IRS to disallow a perfectly legal tax deduction or other tax relief merely because the IRS deems that the motive of the taxpayer was not primarily business-related”.

These are just some of the tax changes in this measure.

It’s important to realize that this legislation will not be signed into law as currently drafted. It’s quite possible there will be no health care legislation passed (Americans are not in favor of the legislation), though I suspect something will be passed. Additionally, it is certain that if the Senate passes legislation it will be very different from the House bill.

This measure would lead to higher taxes on the wealthy. This would lead to more strategies by the wealthy to shelter income, which means more work for tax professionals. Additionally, the requirement that 1099s be issued to corporations would mean a lot more work for tax professionals. As I keep telling my brother, I’m convinced I have lifetime employment.