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Article Author:

Health Care Reform Bills Create Significant Tax Implications for Individuals and Businesses

Late Sunday night the House of Representatives passed the Senate’s Patient Protection and Affordability Act (H.R. 3590) and the Health Care & Education Affordability Reconciliation Act of 2010 (H.R. 4872.) President Obama has signed H.R. 3590 into law, while H.R. 4872 will move to the Senate for a vote this week.

This new legislation brings the most comprehensive changes to the nation’s health care laws in over 40 years and has numerous tax implications for 2010 and beyond. Below, we’ve provided an overview of the new programs that are likely to affect you and your business. 

Businesses

• Large employers (more than 50 employees) who do not provide coverage will be assessed a $2,000 penalty per employee. However, the first 30 employees will be subtracted from the penalty calculation.
• Beginning in 2010, small businesses with 25 or fewer employees with average annual wages of less than $50,000 will be eligible for a tax credit of up to 35 percent if they purchase coverage for their employees. For employers with fewer than 10 employees and average wages of less than $20,000, a 100 percent credit will be available.
  • In 2014 and later, eligible small employers who purchase coverage through the newly formed Insurance Exchange would be eligible for a tax credit for two years, of up to 50 percent of their contribution.
• Beginning in 2018, there will be a 40% excise tax on high dollar health insurance plans.

Individuals

• In years after 2012 there will be a new $2,500 limit on tax-free contributions to health care flexible spending accounts (FSAs.) Consumers will lose the ability to use the FSA funds to purchase non-prescription medications as well.
• For tax years beginning after December 31, 2012, there will be a 0.9 percent increase in Hospital Insurance Tax (HI) on wages in excess of $200,000 per year ($250,000 for joint filers.)
• Beginning in 2013, individuals will be subject to a new 3.8% tax upon the lesser of net investment income (including capital gains, interest, dividends, royalties, income from passive activities and rental income) or modified adjusted gross income in excess of $200,000 ($250,000 for joint filers.)
• In 2013 the threshold for claiming deductions for medical expenses will increase to 10 percent of a taxpayer’s adjusted gross income for taxpayers under age 65.
• In years after 2013, individuals earning less than 400 percent of the federal poverty level, (approximately $88,000 for a family of four) and are not eligible for Medicaid, employer sponsored insurance or other coverage, will be eligible for refundable tax credits to be used to help cover the cost of health insurance premiums. The credits are only available to individuals and families that obtain health care coverage in the newly established insurance exchange. 
• Beginning in 2014, individuals who fail to obtain “minimum essential” insurance coverage will pay a penalty. (Those who fall below the income tax filing threshold will be exempt.)

Economic Substance Doctrine

One provision that is effective immediately and will affect businesses and individuals is the change to the “Economic Substance Doctrine.” The change states that transactions will be treated as having “economic substance” only if they change the taxpayer’s economic position in a meaningful way. The taxpayer must have a substantial purpose for the transaction, other than changing federal income tax liability.

The above changes will cause many individuals and businesses to rethink their tax planning strategies. Please contact Mike Calahan or your Blackman Kallick tax advisor with questions or to discuss how these changes will affect you and your business.

Information taken from BNA Highlights and Thomson Reuters RIA Checkpoint.

Click here for a section-by-section analysis of H.R. 4872, The Health Care & Education Affordability and Reconciliation Act of 2010 by the House of Representatives Committee on Rules.

Our thanks to Alan Alport for his assistance in writing this article. 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.