Mr. Filburn, Meet Mr. Attlee – Taxes, The Health Care Bill, and You

Unless you are a truly basketball-crazed KYEstates reader, by now you are well aware that the Health Care Bill passed the House last night.  This legislation is significant, and that is an understatement. Both supporters and detractors of the bill might see this as America’s analogue to July 5, 1948, when the Attlee Cabinet’s National Health Service Act 1946 came into effect in England and Wales.

Its detractors might see the bill as a reprise of Wickard v. Filburn, 317 U.S. 111 (1942).  (To refresh your recollection, that was the case in which the Commerce Clause was interpreted to bar a farmer from growing crops on his own land to feed his own livestock, because his non-participation in commodities markets would marginally, infinitesimally depress demand for grain and lower prices, causing interstate commerce effects.)

KYEstates doesn’t have jurisdiction to opine on the merits of the bill, but we do have jurisdiction to talk about how the bill might affect your taxes.  Because it will, big time.  The Tax Foundation has produced an excellent summary timeline of when the various tax provisions of the bill go into effect.  Let’s take an advance look at some highlights from the Tax Foundation timeline (annotated by KYEstates) to glimpse what is coming to tax returns near you during the next few years:

2010:

• (July 1): Impose 10% excise tax on indoor tanning services. [Prepare for the beach early this year, or consider spray tan….]

2011:

• Employer W-2 reporting of value of health benefits [Prepare to be shocked what your health insurance really costs]
• Increase in additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses to 20% [Watch out, rule-stretching employees armed with HSA debit cards]
• Impose annual fee on manufacturers and importers of branded drugs [Watch out, Big Pharma]

2013:

• $500,000 deduction limitation on taxable year remuneration to officers, employees, and directors…of covered health insurance providers [Sorry to say it, Louisville friends, but watch out, Humana executives]
• Limit health flexible spending arrangements in cafeteria plans to $2,500; indexed to CPI-U after 2013 [Buy your contact lenses early and often, folks – on the other hand, unless you’re the Gilbreths, how many FSA dollars can one actually use?]
• Impose 2.3% excise tax on manufacturers and importers of certain medical devices [Watch out, you may need to trade down from that brand-name stent….]
• Raise 7.5% AGI floor on medical expenses deduction to 10% [Watch out, people who are sick; we know you were spending all that cash on doctors’ bills because it’s fun!]
• Broaden Medicare Hospital Insurance Tax Base for High-Income Taxpayers – additional HI tax of 0.9% on earned income in excess of $200,000/$250,000 (unindexed), and Unearned Income Medicare Contribution on 3.8% on investment income for taxpayers with AGI in excess of $200,000/$250,000 (unindexed) [Watch out, “high” earners and people living in high-cost, high-salary “Blue States”….]  As reported by Greg Herman-Giddens in North Carolina Estate Planning Blog, the investment income excise tax doesn’t apply to retirement benefits. For more on this topic, read the comments to this Tax Prof Blog post (which also notes that municipal bond interest is not subject to the 3.8% Medicare tax).

2014:

• Impose annual fee on health insurance providers; based upon firm’s market share starting in 2013 [Watch out, Humana, United Health, et al., in case you didn’t get the message the year before, when your executives’ salaries got de-facto capped…]
• Excise Tax (i.e., penalty) on Individuals Without Essential Health Benefits Coverage [Watch out, freedom-loving bohemians…Watch out, everyone?].  For more on the individual coverage requirement, see additional Tax Policy Foundation coverage here.  Apparently, the IRS will not be turning its full enforcement powers on health insurance scofflaws.  For now….
• Excise Tax (i.e., penalty) on Employers Not Providing Health Insurance Coverage to Employees (Shared Responsibility for Employers) [Watch out, creators and providers of jobs. Consider additional outsourcing to India as a workaround?]

2018:

• 40% excise tax on health coverage in excess of $10,200/$27,500 … indexed for inflation by CPI-U plus 1% [This is the “Cadillac Tax”; watch out, union members and UAW retirees….]

What should jump out at readers is that the 0.9% and 3.8% additional taxes that come “on stream” in 2013 are not indexed.  Some readers (at least here in the “Flyover”) may see the $200,000 (single) or $250,000 (married, filing jointly) thresholds and think they have nothing to worry about.  But remember inflation, and its cousin, bracket creep?  (Lest you think “Bracket creep is a ’70s issue – stop worrying!”, don’t forget about the Alternative Minimum Tax, which initially affected only 155 households in 1970 and now threatens up to 20% of households.)  To understand when the Health Care Bill will start raising your taxes due to its nonindexing features, let’s have some fun with numbers:

If inflation runs 3% per year between now and 2013, $200,000 in 2013 will only buy what $183,000 does today.

If inflation runs 5% per year between now and 2013, $200,000 in 2013 will only buy what $173,000 does today.

If China grows tired of sending us actual products in return for electronic book-entry T-Bills, and inflation runs 6% per year between now and 2013, $200,000 in 2013 will only buy what $168,000 does today.

Readers, you get the idea.  (Be of good cheer, these taxes apply only to rich people!)  Thanks to the miracles of nonindexing and bracket creep, just be a little bit patient, and soon you’ll pay taxes like a rich person, too.

There are practical consequences to this: those offering whole-life insurance policies, annuities, and deferred compensation arrangements may benefit, as the benefits of deferring taxable income increase.

KYEstates hopes the health care bill succeeds.  The legislation has important tax consequences, however, that are important to understand, so one can plan accordingly. In the meantime, readers, stay healthy! (For help with that, consult the good folks in Morrisville, Vermont.  No taxes necessary!)