Health Care and Taxes: A Pause Before Impact

New York Times Digital reports:

“The vastly expanded benefits of the new health care law have been well advertised, but the taxes imposed to provide insurance coverage for tens of millions of additional Americans and their pre-existing conditions have received much less public attention.

Not only were these various levies — and credits for small business — determined more quietly in the process of enacting the law, but most are two years or more from taking effect.

”They don’t get a lot of attention when they’re not applicable until 2013,” said Melissa Labant, a tax manager at the American Institute of Certified Public Accountants here.

But far-reaching these measures are, like a 10 percent tax for visiting a tanning salon (it took effect last July) and a first-time Medicare bite on investment income (coming in two years). A 40 percent tax on high-value health coverage begins in 2018.

Financial planners are already ruminating about how the changes may affect clients’ strategies. Besides using the traditional technique of accelerating income into the current year when higher tax rates loom, taxpayers may want to consider municipal over taxable corporate bonds — and try harder to bunch optional health care expenses to reach the new threshold for deducting them.

Beginning in 2013, that threshold for taking medical deductions rises to 10 percent of adjusted gross income, from 7.5 percent. In 2014, a new $2,500 limit kicks in for flexible spending accounts, which can be used for health costs.

”It’s something people are starting to fret about,” said Claire E. Toth, a planner and tax specialist at Point View Financial Services in Summit, N.J.

Broadly speaking, the revenue measures reflect the Obama administration’s efforts to confine tax increases to those in the upper income bracket. Still in some cases, the less well-off will pay more, too, if perhaps indirectly.

One of the biggest items is an increase in the Medicare payroll tax, which has been expanded to apply to investment income for the first time. This includes capital gains, dividends, interest, annuities, rents and royalties, but not distributions from retirement plans or interest from municipal bonds.

When it takes effect in 2013, this tax will be 3.8 percent of net investment income, or the amount by which modified adjusted gross income exceeds the threshold, whichever is less. The threshold is $250,000 for a jointly filing married couple or $200,000 for single filers. A taxpayer with no investment income is not affected, nor is one whose entire income is from investments, so long as its total is below the threshold.

Capital gains include profits on home sales, but the existing exclusion of $500,000 ($250,000 for single filers) still applies. This means a home-selling couple would owe nothing unless these profit was more than $500,000 and their income was more than $250,000.

But those who have such hefty gains and are thinking of a move may want to consider selling before the end of 2012, tax specialists suggest. It may also be a good idea to collect documents showing home improvements, which raise the home’s cost basis and thus lower capital gains.

They also say the investment tax raises the so-called marriage penalty, because two cohabiting singles can earn $400,000 before hitting the threshold.

A second major element in the new law is an increase in the levy on employees for the Medicare hospital insurance tax, to 2.35 percent from 1.45 percent, with the same income thresholds and effective date as the investment tax. Those with both high wages and high investment income would pay both taxes. The self-employed will pay an additional 0.5 percent on income above the threshold, starting in 2013.

Two items of tax reporting in the new law are of more immediate focus. One is a roundly criticized requirement that businesses send Form 1099’s to other businesses for every transaction, on goods as well as services, of $600 or more, beginning in 2012.

Opponents see this as a serious paperwork burden and a disadvantage to small companies, and it is widely expected to be repealed. (The Senate has voted to do so, and a House committee is to take up the issue this week.)

The other requires employers to list on Form W-2 the value of sponsored health care benefits, which are not to be taxed. This disclosure was to take effect for 2011, but the Internal Revenue Service has made it optional this year, with application now scheduled for 2012 taxes.

Another important provision of the health law is a 40 percent tax, indexed for inflation, on insurers providing so-called Cadillac coverage for 50 or more employees and applying to portions of premiums above $27,500 a year for a family or $10,200 for an individual. Such plans are typically enjoyed by many members of unions, which won a delay in the effective date until 2018.

There is another element that, while not a tax, may seem like one. It is an annual fee imposed on health care companies in proportion to their market share. In total, it amounts to $8 billion in 2014 and rises in future years. Some, and perhaps all, of this is expected to be passed on to consumers as higher premiums.

In addition, an excise tax of 2.3 percent is to begin in 2013 on manufacturers and importers of specified medical devices.

OF course, the most hotly disputed part of the law is its ”mandate” provision. In 2014, the I.R.S. will start imposing a penalty — though not a tax — on individuals who do not buy insurance. Initially, it will be $95 or 1 percent of income, whichever is greater. The penalty rises to $695 or 2.5 percent of income by 2016. A host of state suits are challenging the constitutionality of this crucial element.

Businesses with more than 50 employees that do not provide health coverage must pay a tax of $2,000 per employee, beginning in 2014. As for smaller companies, a 35 percent tax credit against insurance costs will be provided for up to six years, to encourage them to offer coverage. The credit starts to phase out as the number of workers rises above 10 and average pay rises above $25,000. For example, a company with 17 employees and an average wage of $38,000 gets nothing.

”It’s so confusing and time-consuming that a lot of C.P.A.’s and clients think the cost of calculation exceeds the potential benefits,” Ms. Labant said. The National Federation of Independent Business estimates that fewer than half the eligible four million small businesses will actually receive the credit.

Ms. Toth, the planner, said the credit might work well ”in some parts of the country, but not in the New York area,” because its wages are relatively high.”