Monday, July 9, 2012

Well, We Have a Health Care Bill: Now What?

The Supreme Court declared the Affordable Care Act (Obamacare) constitutional by a 5-4 margin.  The ruling now sets the law in motion and has a range of implications in financial and retirement planning.  The law mandates health insurance for all Americans, and imposes a variety of new taxes (20 taxes are new or higher under the Act).  Here are some provisions that will take effect on January 1, 2013:

1.     The ‘Investment Tax’.  This is a major change in the laws and is a tax on investment income for upper-income individuals.   For single taxpayers with Adjusted Gross Income (AGI) over $200,000,or $250,000 for married filing jointly, the Unearned Income Medicare Contribution (UIMC) imposes a 3.8% tax on dividends, interest and capital gains.  Add this to the expiration of current tax laws (the Bush Tax Cuts), and the federal tax rate on capital gains goes from 15% to 23.8%. The tax rate on dividends jumps from 15% to 43.4%.  It seems logical that this will cause a repositioning of assets (and the corresponding market movements) amongst individuals over the threshold.  This provision can affect individuals in years where an individual has a large income event , like the sale of property, or large distributions from an inherited IRA.
2.     The ‘Big Medical Expense Tax’.  Currently, you can deduct, as an itemized deduction, all medical expenses in excess of 7 ½% of AGI. The Act increases the income threshold beginning in 2013 for claiming the itemized deduction for medical expenses from 7 ½ percent to 10 percent of adjusted gross income. However, individuals over 65 will still be able to claim the itemized deduction for medical expenses at 7 ½ percent of AGI through 2016. Increasing the threshold to 10% means that your itemized deductions for medical expenses will be reduced.
3.     The ‘Payroll Tax’.   The Act increases the employee portion of the Medicare payroll tax (the hospital insurance tax part of FICA) from 1.45 percent to 2.35 percent on AGI over $200,000 (single), $250,000 (married filing jointly or surviving spouse), and $125,000 for married persons filing separately. The AGI test is a new aspect on Medicare taxes. Because employers will have no way of knowing what their married employees’ joint incomes are, the tax will have to be computed on Form 1040. Until now, the Medicare tax was entirely a payroll tax. For self-employed persons, the tax increase is the same and applies to the hospital insurance portion of the tax on self-employment income.
4.     The ‘Medical Devices Tax.’  The Act imposes a 2.3% excise tax on every medical device, like pacemakers, artificial joints, MRI machines, and pretty much every medical device.  There is currently a proposed repeal of the excise tax.
5.     The ‘Medicine Cabinet Tax.’  This provision, which actually became effective in 2011, prohibits reimbursement of expenses for over-the-counter medicines (except insulin) from an employee’s pre-tax dollar funded Health Saving Account (HSA), Flexible Spending Account (FSA), or Health Reimbursement Account (HRA).
6.     The ‘Health Savings Account (HSA) Withdrawal Tax’. This provision increases the additional tax on non-medical early withdrawals from an HSA from 10% currently to 20% beginning in 2013. This provision actually makes HSAs different from Individual Retirement Accounts (IRAs) and other tax advantaged accounts, all of which remain with a 10% early withdrawal tax.

There are a variety of other provisions, including a tax on employers for not providing insurance (no longer called a ‘penalty’, per the Supreme Court), and a tax on individuals who don’t buy health insurance.  There are a multitude of other provisions that ‘phase-in’ over time.

Overall, some planning ideas come to mind:
1.     Individuals should consider reviewing their investment portfolios, potentially repositioning into municipal bonds in taxable accounts, and possibly putting equities into IRAs or deferred accounts.
2.     Individuals under 65 facing medical treatment that may be deductible (e.g. dental implants, etc.) may want to consider having the treatment preformed and deducted in 2012.  Recognize that medical expenses are deductible if paid by credit card.
3.     Although non-medical withdrawals from an HSA are inadvisable; if one was to take an HSA withdrawal, it should be done before the end of 2012.
4.     Medical treatments with type I, II and III medical devices, might be performed (if elected) in 2012.
5.     Individuals with control over their earned income (like with stock options or self-employment), may want to accelerate income (minding tax brackets) to keep away from the additional Medicare tax and the prospect of the increase in tax rates scheduled for year-end.

The ACA is the tip of the iceberg for the events surrounding year-end.  Tax cut expiration, payroll tax increases, budget cuts, and a debt ceiling expiration could all contribute to a tumultuous year end.