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We have already received many questions from our clients about the impact of this historic legislation on their individual tax situations. Very briefly, here are the key provisions which will affect income taxes most directly in the coming years. |
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| Healthcare Revenue Provisions | |
On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (H.R. 3590). The Act had initially passed the Senate in December and was passed by the House on March 21. President Obama stated, "While the Senate still has the last round of improvements to make on this historic legislation – and these are improvements I'm confident they will make swiftly – the bill I'm signing will set in motion reforms that generations of Americans have fought for, and marched for, and hungered to see." As the actual language was disclosed in the 2,733 page healthcare bill and 150 page reconciliation bill, a clearer picture of the actual revenue provisions within the bill emerged. There are six major revenue provisions that will have widespread impact. These include the following: 1. Medicare Tax Increase The Medicare tax increase will apply for single persons with incomes over $200,000 and married couples with income over $250,000. The regular Medicare tax is 1.45% on the employee and 1.45% on the employer, for a total of 2.9%. Upper income individuals will face an added 0.9% hospital insurance tax, raising the total Medicare rate at those levels to 3.8%. The additional tax will be on the employee and not on the employer. The increased Medicare tax will be effective starting in 2013. If the upper income rate is increased from 35% to 39.6% in 2011, the top marginal federal tax rate (income tax plus Medicare tax) for high-income persons in 2013 will be 43.4%. State and local taxes will be added to this number. 2. Medicare Tax on Unearned Income Starting in 2013, the 3.8% tax for single persons with incomes over $200,000 and married couples with income over $250,000 will apply to unearned income. This is defined as interest, dividends, capital gains, annuities, royalties, rents and other types of passive income. The reconciliation bill did exclude qualified retirement plan distributions. Therefore, distributions from a 401(k), 403(b) or other qualified retirement plan will be excluded from this 3.8% tax. Pure charitable trusts with only charitable interests are also excluded. If the capital gain rate increases to 20% in 2011, then by 2013 the federal tax rate (capital gains and Medicare) for substantial sales of property will be 23.8%. 3. Cadillac Plan 40% Excise Tax As part of the negotiation process during the development of the healthcare bills, the Senate decided to tax "Cadillac" or expensive healthcare plans. Under the reconciliation compromise, the 40% excise will be paid by the insurer and it will apply if the total medical coverage for a single person is over $10,200 or $27,500 for a married couple. The reconciliation bill excludes dental and vision benefits from the plan. There is also an increase of $1,350 for individual coverage and $3,000 for family coverage for certain high-risk professions. The excise tax will apply in 2018 and later years. 4. Health Insurers Fee There will be a new fee on large health insurers based upon their market share. The fee is scheduled to raise $101 billion over 10 years. It is expected that the fee will lead to higher insurance premiums. 5. Fee on Pharmaceutical Manufacturers A new fee of $23 billion over 10 years will apply to pharmaceutical manufacturers. There are various exclusions for most federal programs in the determination of market share and the applicable fee. However, drugs sold to the general public will subject the pharmaceutical manufacturers to the new fee. It is expected that drug prices will increase to reflect the new fee. 6. Medical Device Fee There is a new 2.3% tax on medical devices sold in year 2013 and later years. The tax will not apply to eyeglasses, contact lenses and hearing aids. This tax will increase the cost of medical devices to consumers by 2.3%. Healthcare Bill Modifications: The reconciliation bill passed the Senate by a vote of 56-43 and also passed the House later on March 25, 2010 by a vote of 220-207 included five major healthcare bill modifications: 1. Closing the Medicare prescription drug "donut hole" – Seniors will be covered by 2020. In addition, there is a $250 rebate for seniors who currently spend more than $2,830 on prescription drugs. 2. The "Cadillac" Tax – A 40% excise tax on insurance plans with value over $10,200 for an individual or $27,500 for a family will be applicable in 2018. 3. New Medicare Tax on Investment Income – A 3.8% tax will apply in 2013 for single persons with incomes over $200,000 and married couples over $250,000 in income. 4. Individual No-Insurance Fine – The fine for individuals with no medical insurance is reduced from $750 to $695 per year. 5. Large Company No-Insurance Fine – For a large company that does not provide healthcare insurance to employees, the fine is increased from $750 to $2,000 per employee. Estate Tax Update: The estate tax laws are in a suspended state at this moment until and if Congress acts on this matter. What this means is that for 2010 only there is no estate tax. If no action is taken by Congress by 12/31/10 to change this situation, then the estate tax rates are scheduled to revert back to the older rates of 55% on all estates over $1,000,000. The word is that Congress will attempt to pass new estate legislation during 2010 and also try to make the provisions retroactive to January 1, 2010 in order to remedy this situation. Clearly the estate planning community is in a state of disarray at this time as we try to second guess what Congress may accomplish in this area in the coming months. |
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