On March 25, 2010 both the U.S. Senate and House of Representatives passed the second stage of President Obama’s healthcare Reform package. Following is a general description of the Bill’s tax and other costs issues impacting individual and business taxpayers. Since the provisions of the Bill take effect over a period of years, they are organized by when the provisions first become effective.
Effective on the date of enactment, unmarried children under age 27 can be insured on a parent’s health insurance plan, and such plans must extend coverage if they offer dependent coverage.
The adoption credit and adoption assistance exclusion are each increased by $1,000 for tax years beginning on or after January 1, 2010; the credit is made refundable and is extended through 2011.
Effective July 1, 2010, a 10% federal excise tax is imposed on indoor tanning services, to be paid by the service recipient and collected and remitted by the service provider.
A Small Employer Health Insurance Credit is allowed for tax years beginning after December 31, 2009. This credit, which is extremely complex, is equal to 35% (increases to 50% beginning in 2014) of the employer-paid premiums for qualified health insurance provided to qualified employees (and their families).
- The employer must pay at least 50% of the health insurance premium cost.
- A Small Employer is one that has 10 or fewer “full-time equivalent” qualified employees who have an average annual wage of $25,000.
- The allowable credit is phased out for employers with more than 10 but no more than 25 full-time equivalent qualified employees, or who have an average annual wage of more than $50,000.
- Full-time equivalent employees are based on 2,080 hours per year and exclude non-qualified employees.
- Non-qualified employees include self-employed individuals (partners and sole proprietors), 2% shareholders of S Corporations, 5% owners of regular corporations and virtually any relative of such and, therefore no credit is allowed for health insurance premiums paid for them. The number of qualified employees is aggregated to take into account all employers within controlled groups.
- For regular business taxpayers, the credit is a non-refundable general business credit and can offset Alternative Minimum Tax.
- For nonprofit organizations, the credit is reduced to an initial 25% (increasing to 35% in 2014) and is taken as a credit against otherwise payable payroll taxes.
For tax years beginning after December 31, 2010, most over-the-counter medications will no longer be eligible for reimbursement through health reimbursement accounts, flexible savings accounts, health savings accounts or Archer medical savings accounts.
A 20% penalty will be imposed for distributions from health savings accounts and Archer medical savings accounts made after December 31, 2009, which are not used for qualified medical expenses.
For tax years beginning after December 31, 2012:
The allowable contributions to health flexible spending accounts will be capped at $2,500 per year.
The itemized deduction for medical expenses will be limited to amounts in excess of 10% of adjusted gross income (was 7.5%). For individuals age 65 or over, this change is delayed until 2017.
The employee portion of Medicare hospital insurance tax will increase from 1.45% of wages to 2.35% of wages over $200,000 for single taxpayers and $250,000 for married couples. Self-employed persons will pay 3.8% on earnings over the threshold amounts.
A 3.8% Medicare hospital insurance tax is extended to investment income of single taxpayers with adjusted gross incomes above $200,000 and married joint filers above $250,000. Net investment income includes taxable interest, dividends, royalties, non-qualified annuities, rents, income from passive trade or business investments and net capital gains.
A penalty will be imposed on U.S. citizens and legal residents without qualifying health insurance coverage. The penalty is phased in over a three-year period and is capped at the greater of $695 per person per year ($2,085 maximum per family) or 2.5% of taxable income.
A premium assistance tax credit for low and middle income individuals and families (earning up to 400% of the federal poverty level) to facilitate the purchase of health insurance.
A penalty of up to $2,000 per employee will be imposed on employers with at least 50 employees that do not offer health insurance to their employees.
For tax years beginning after December 31, 2017, a 40% excise tax is imposed on high-cost employer-sponsored health coverage.