Tuesday, March 23, 2010

Everything You Were Afraid You'd Learn About Healthcare Reform

I'm surprised FB hasn't sustained a meltdown since the weekend's passage of the initial Healthcare Reform Bill, which now goes to the President's desk for signing.


There's more to come in the companion Reconciliation Bill, which must still run the gauntlet of a contentious Congress before either can have the effect of The Law of The Land. 
Jim Trippon with TaxCPAHouston.com has compiled a fairly cogent summary of the initial tax implications we'll all be confronting if ObamaCare indeed becomes Law:

The health-care bill that passed the House yesterday is funded in part by increases in Medicare and other taxes, and by a reduction in some tax breaks. Will you pay higher taxes as a result? Here's a rundown of the more-prominent changes for individual taxpayers:

• Change in healthcare Flex plans.
Employees will be able to set aside less, tax-free, in employer-provided healthcare flexible spending accounts (FSAs).

As of 2013, that limit will be $2,500 a year, instead of the $5,000 that many employers now allow. The $2,500 figure will be indexed annually for inflation. For someone in the 28-percent tax bracket, that amounts to the 
loss of a $700 tax break. And funds from the plans may no longer be used for over-the-counter medications, unless they're prescribed by a health-care professional.

• A higher Medicare payroll tax as of 2013.
This affects individuals with adjusted gross incomes of $200,000 or more, and couples filing jointly with AGI of $250,000 or more. The Medicare tax will rise by 0.9 percent over current rates of 1.45 for employees and 2.9 percent for the self-employed.

For a single person earning $300,000, for instance, that extra tax would translate to $900 a year. Incidentally, those applicable AGIs of $200,000 and $250,000 
aren't indexed for inflation.

{Brent's note: Remember the problem with AMT? Same flaw here.}

• New tax on net investment income.
In the reconciliation act that now moves to the Senate, net investment income among those higher earners—including the self-employed and estates and trusts—would be taxed at 3.8 percent, starting in 2013. According to 
CCH Wolters Kluwer, a financial information publisher, that income includes interest, dividends, royalties, rents, and "gain from the sale of property, and income earned from a trade or business that is a passive activity."

Distributions from IRAs, qualified retirement plans—including pensions and certain retirement accounts such as IRAs and 403(b) plans—would be exempt from the additional tax. (We're still waiting to hear if 401(k) plans are included on that list; the tax expert we enlisted couldn't find it in the language of the bill.)

• Higher medical-expense deduction.
As of 2013, you can only deduct 
qualifying medical expenses that exceed 10 percent of your adjusted gross income, up from the current 7.5 percent. That 10 percent deduction floor remains the same for households subject to the Alternative Minimum Tax. Households in which at least one member turns 65 as of 2013 would be exempt from this change through 2016.

Individuals who don't want to buy health insurance 
will be required to pay penalties that start at $95 in 2014 and increase from there. While these penalties aren't called taxes, many who oppose them construe them as such, and indeed, it'll be 
up to the IRS to enforce collection of the fines.

{Brent note: If it walks and smells like a duck...}
Taxpayers indirectly pay for the various subsidies in the $940 billion plan.

On the other hand, households with incomes at or below four times the official poverty level are slated to receive tax credits for buying health insurance on their own. Those refundable credits are designed to ensure that those individuals and families don't spend more than a certain percentage of household income on premiums. The credits reduce households' liability for health coverage to between 2 percent and 9.5 percent of income, with those making the least paying the lowest percentage out of pocket.

{Brent's note: Way to incentivize upward mobility and aspiring to earn more.}

Jim Trippon appears every Tuesday morning from 7:00a-8:00a CDT on The CNN650 Morning Show. Listen on line at CNN650.com.
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