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How Will the Health Care Legislation Affect You and Your Taxes?

In late March 2010, President Obama signed into law the new health care legislation. The legislation will affect virtually every individual in one way or another and will significantly impact the preparation of tax returns in the future. The provisions take effect over a period of years and are categorized by the year they become effective. Some of the provisions include additional taxes to offset the cost of the health care benefits included in the legislation for lower-income individuals.

The following is an overview of the provisions that apply to individual taxpayers and small businesses.

2009
o Student Loan Forgiveness for Health Professionals – Excludes student loan debt forgiveness from income for certain medical professionals who work in health professional shortage areas.

o Investment Credit for Therapeutic Discovery Projects – A small company investment tax credit for expenses incurred for qualified investments in qualifying therapeutic discovery projects.

2010
o Insurance for Uninsured Americans with Pre-Existing Conditions – A Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition.

o Expanding Coverage for Early Retirees – A program that provides reimbursement to sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents.

o Providing Free Preventive Care – New plans must cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance.

o Pre-Existing Condition Exclusions for Children Under Age 19 – For new plans and existing group plans, the new law includes rules to prevent insurance companies from denying coverage to children under the age of 19 due to a pre-existing condition.

o Elimination of Arbitrary Rescission of Coverage – Insurance companies may no longer retroactively cancel policies because of an "unintentional" mistake on paperwork.

o Lifetime Limits are Phased Out – Effective for all policies issued after September 23, 2010 and those renewing after this date, there can no longer be lifetime limits placed on health care plans.

o Annual Dollar Limits – There is a phase out of annual dollar expenditure limits on health plans over the next three years until 2014 when the Affordable Care Act bans them for most plans.

o Tanning Services Excise Tax – A new 10% excise tax is imposed on the amount paid for any indoor tanning service.

o Excludable Medical Reimbursements for Older Children – An income exclusion for reimbursements of medical care expenses by an employer-provided accident or health plan is extended to any child of an employee who hasn't attained age 27.

o Self-Employed Health Insurance Deduction – Self-employed individuals may include in their tax-deductible health insurance children who have not attained age 27.

o Tax Credits for Small Employers Offering Health Coverage – Provides a tax credit for an eligible small employer for non-elective contributions to purchase health insurance for its employees.

2011
o Employer W-2 Reporting Responsibilities – Employers will be required to disclose the aggregate cost of employer-sponsored health coverage to their employees on Form W-2.

o Increased Tax on Nonqualifying HSA or Archer MSA Distributions – The additional tax for making non-medical withdrawals from Health Savings Plans and Archer MSA plans is increased to 20%.

o Over-the-Counter Medication Restriction for Employer Plans – Over-the-counter medications will no longer qualify for reimbursement.

o Small Employer Simple Cafeteria Plans – Small employers may provide employees with a "simple cafeteria plan."

2012
O Information Reporting Required for Payments to Corporations – Businesses that pay any amount greater than $600 during the year to non-tax-exempt corporate providers of property and services will have to file an information report with each provider and with IRS.

2013
o Additional Hospital Insurance Tax for High-Income Taxpayers – The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on incomes over a threshold.

o Surtax on Unearned Income for High-Income Taxpayers – A 3.8% surtax is imposed on net investment income of high-income individuals, estates, and trusts.

o Employer Health FLEX-Spending Plan Contributions Limited – Medical reimbursements from flexible spending plans is limited to $2,500.

o Medical Itemized Deductions Limited – The AGI threshold percentage for claiming itemized medical expenses is increased from 7.5% to 10%.

o Compensation Deduction Limit for Health Insurance Issuers – Limits companies' deduction for certain employees' compensation.

2014
o Mandatory Heath Insurance Overview – Many of the provisions of the Health Care Legislation are linked to the mandate that everyone becomes insured. The chart provides an overview of how these provisions interact to achieve that goal.

o American Health Benefit Exchanges – By 2014, each state must establish an exchange to help individuals and small employers obtain coverage.

o Penalty For Not Being Insured – Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage.

o Premium Assistance Credit – Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”.

o Free Choice Vouchers – Employers who offer minimum essential coverage through an eligible employer-sponsored plan and are paying a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage through the insurance exchange.

o Large Employer Health Coverage Excise Tax – Large employers would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy.

2018
o Excise Tax on High-Cost Employer-Sponsored Health Coverage – There will be a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed certain limits.

Student Loan Forgiveness for Health Professionals: Previously, an individual’s gross income didn’t include cancellation of debt income that was attributable to the discharge of all or part of any student loan if the discharge was made under a provision of the loan - that all or part of the...
more »

Investment Credit for Therapeutic Discovery Projects: In 2009 and 2010, for companies with 250 or fewer employees, a 50% nonrefundable investment tax credit is allowed for expenses paid or incurred for qualified investments in qualifying therapeutic discovery projects. Qualifying Therapeutic Discovery Project...
more »

Insurance for Uninsured Americans with Pre-existing Conditions: Beginning July 1, 2010, a Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition. States have the option of running this new program in...
more »

Expanding Coverage for Early Retirees: Too often, Americans who retire without employer-sponsored insurance and before they are eligible for Medicare see their life savings disappear because of high rates in the individual market. To preserve employer coverage for early retirees until more...
more »

Providing Free Preventive Care: Effective for health plan years beginning on or after September 23, 2010, all new plans must cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance....
more »

Pre-existing Condition Exclusions for Children Under Age 19: Effective for health plan years beginning on or after September 23, 2010, for new plans and existing group plans, the new law includes rules to prevent insurance companies from denying coverage to children under the age of 19 due to a pre-existing condition....
more »

Elimination of Arbitrary Rescission of Coverage: Effective for health plan years beginning on or after September 23, 2010, insurance companies may no longer retroactively cancel a policy because of sickness or an "unintentional" mistake on paperwork. The only exception is if the case involves fraud...
more »

Annual Dollar Limits: There is a phase out of annual dollar expenditure limits on health plans over the next three years until 2014 when the Affordable Care Act bans them for most plans. Thus, plans issued or renewed beginning September 23, 2010 will be allowed to set annual...
more »

Tanning Services Excise Tax: For indoor tanning services performed on or after July 1, 2010, a new 10% excise tax is imposed on the amount paid for any indoor tanning service, whether paid for by insurance or otherwise. The tax is imposed on tanning service recipients, although the...
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Employer Tax-Free Medical Benefits Available to Children under Age 27: As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee's children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010. Generally, under pre-Act law, to be...
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Big Break for Self-Employed Health Insurance Deduction: Background - A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of himself, his spouse and his...
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Tax Credits for Small Employers Offering Health Coverage: The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. The term "nonelective contribution" means an employer contribution...
more »

Employer W-2 Reporting Responsibilities: Beginning in tax year 2011, employers will be required to disclose the aggregate cost of the benefit provided by them by the employer-sponsored health insurance coverage on the employee's annual Form W-2. The amount included in the W-2 does not include...
more »

Increased Tax on Nonqualifying HSA or Archer MSA Distributions: The additional tax for HSA withdrawals for other than qualified medical expenses before age 65 are increased from 10% to 20%, and the additional tax for Archer MSA withdrawals for other than qualified medical expenses is increased from 15% to 20%. Distributions...
more »

Over-the-Counter Medication Restriction for Employer Plans: Beginning in 2011, over-the-counter medications, except for doctor prescribed over-the-counter medication and insulin, will no longer qualify for reimbursement. This restriction applies to health reimbursement accounts (HRAs), health flexible spending...
more »

Small Employer Simple Cafeteria Plans: For years beginning after Dec. 31, 2010, small employers (average of 100 or fewer employees on business days during either of the two preceding years) may provide employees with a "simple cafeteria plan." Under such a plan, the employer is provided with...
more »

Information Reporting Required for Payments to Corporations: For payments made after Dec. 31, 2011, businesses that pay any amount greater than $600 during the year to non-tax-exempt corporate providers of property and services will have to file an information report with each provider and with IRS.This is a BIG...
more »

Additional Hospital Insurance Tax – High-Income Taxpayers: The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on individual taxpayer earnings (wage withholding and SE tax) in excess of compensation thresholds for the taxpayer’s filing status; see table...
more »

Surtax on Unearned Income: A new surtax called the Unearned Income Medicare Contribution Tax is imposed on individuals, estates, and trusts.Individuals - For individuals, the surtax is 3.8% of the lesser of:1. The taxpayer’s net investment income or2. The excess of modified...
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Employer Health Flex-Spending Plan Contributions Limited: In order for a health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee's dependents, and any other eligible beneficiaries with respect to the...
more »

Medical Itemized Deductions Limited: The itemized deduction for medical expenses will be limited in the following manner:AGI Threshold - The AGI threshold percentage for claiming medical expenses on a taxpayer’s Schedule A is increased from 7.5% to 10%, which is the same as the current...
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$500,000 Compensation Deduction Limit for Health Insurance Issuers: For services performed during that year, a covered health insurance provider isn't allowed a compensation deduction for an “applicable individual” (officers, employees, directors, and other workers or service providers such as consultants)...
more »

Mandatory Health Insurance Overview: Many of the provisions of the Health Care Legislation are linked to the mandate that everyone becomes insured. The chart included here provides an overview of how these provisions interact to achieve that goal.Click here for the chart....
more »

American Health Benefit Exchanges: By 2014, each state must establish an exchange to help individuals and small employers obtain coverage. Benefit options will be in a standard format and a single enrollment form used for all policies. Plans offered through an exchange must provide essential...
more »

Penalty for Not Being Insured: Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage, which includes:o Government-sponsored programs (e.g., Medicare, Medicaid, Children's Health Insurance Program),...
more »

Premium Assistance Credit: Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”. "Exchange" The Health Care Act requires each state to establish an “American...
more »

Free Choice Vouchers: Employers who offer minimum essential coverage through an eligible employer-sponsored plan and are paying a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage...
more »

Large Employer Health Coverage Excise Tax: Large employers, generally those with 50 full-time employees in the prior calendar year, that:o Do not offer coverage for all its full-time employees, o Offer minimum essential coverage that is unaffordable (employee contribution is more than 9.5% of...
more »

Excise Tax on High-Cost Employer-Sponsored Health Coverage: Beginning in tax year 2018, there will be a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed the following amounts: Single Coverage: $10,200...
more »