Tax Changes in New Health Care Bill

Passage of the Health Care and Education Reconciliation Act of 2010 ("Reconciliation Act") amending the Patient Protection and Affordable Care Act of 2010 (together the "Health Care Reform Package"), which President Obama signed on March 23 created many tax changes. Many of these tax changes are discussed below.

Additional Medicare Payroll Tax

Beginning in the 2013 taxable year, the Reconciliation Act imposes a 3.8 percent "unearned income Medicare contribution" tax on the lesser of the taxpayer's net investment income or modified adjusted gross income ("AGI") in excess of $200,000 for singles and $250,000 for joint filers.

Net investment income includes interests, dividends, annuities, royalties, rents, gain from disposing of property from a passive activity, income earned from a trade or business that is a passive activity, and income earned from a trade or business of trading financial instruments of commodities as defined by existing mark-to-market tax rules for dealers of commodities. Income on an investment of working capital is also taxed. In determining net investment income, investment income is reduced by deductions properly allocable to that income. Some income is exempt from the tax, including income from the disposition of certain active partnerships and S corporations, distributions from qualified retirement plans, and any item taken into account in determining self-employment income. The tax does not apply to nonresident aliens or trusts for which all of the unexpired interests are devoted to charitable purposes.

The provision defines modified adjusted gross income as AGI increased by any income excluded by the foreign earned income exclusion over the amount of any deductions and exclusions disallowed with respect to that income.

Estates and trusts are also subject to a 3.8 percent unearned income Medicare contribution tax on the lesser of the undistributed net investment income for the tax year or the excess of adjusted gross income over the dollar amount at which the 39.6 percent tax bracket for trusts and estates begin.

Small Business Tax Credit

Beginning in 2010, many small businesses and tax-exempt organizations that provide health insurance coverage to their employees now qualify for a special tax credit.

The credit is designed to encourage small employers to offer health coverage for the first time or to maintain health coverage they already have.

An employer generally qualifies for this credit if the business has no more than 25 full-time equivalent ("FTE") employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers. The qualified small employer must contribute at least one-half of the cost of health insurance premiums for coverage of its participating employees.

In 2010 through 2013, qualified small employers may qualify for a tax credit of up to 35 percent of their contribution toward the employee's health insurance premium. After 2013, small employers that purchase coverage through an insurance exchange may qualify for a credit for two years of up to 50 percent of their contribution and 35 percent of premiums paid by eligible employers that are tax-exempt organizations.

The maximum credit goes to smaller employers with 10 or fewer FTEs paying annual average wages of $25,000 or less.

Eligible small businesses can claim the credit as part the general business credit starting with the 2010 income tax return they file in 2011. The IRS will provide further information on how to claim the credit for tax-exempt employers.

Excise Tax on "Cadillac" Health Plans

Beginning in 2018, the Health Care Reform Package will impose a 40 percent nondeductible tax on insurance companies or plan administrators for any health insurance plan with an annual premium in excess of an inflation-adjusted $10,200 for individuals and an inflation-adjusted $27,500 for families. There is a higher premium level for employers in certain high-risk professions: $11,850 for individual coverage and $30,950 for family coverage. Non-Medicare retirees age 55 and older are also eligible for higher thresholds.

Dental and vision plans are not included when calculating the total benefit value.

Corporate Estimated Taxes

The Reconciliation Act includes a one-time increase of 15.75 percentage points for estimated taxes of corporations with assets of at least $1 billion dollars for payments made during July, August, and September of 2014. Payments will be decreased by a corresponding amount during the following quarter.

Individual Mandate

Pursuant to the Health Care Reform Package most individuals who fail to maintain essential minimum universal coverage are liable for penalties. The penalty is based on the greater of a flat-dollar amount or a percentage of household income. The Reconciliation Act exempts income below the filing threshold, lowers the flat payments required from $495 to $325 in 2015 and from $750 to $695 in 2016 and increases the percent-of-income thresholds.

The employer-provided health coverage gross income exclusion extends to coverage for adult children up to age 26 as of the end of the tax year. Self-employed individuals are allowed a deduction for the premiums paid on the dependent care coverage for adult children up to age 26.

Employer Responsibility

The Health Care Reform Package generally does not require employers to provide health insurance coverage. However, beginning in 2014, a fee is imposed on firms with 50 or more employees that do not provide coverage. The fee is calculated based on the number of full-time employees.

The Reconciliation Act modifies that provision by excluding the first 30 employees from the payment calculation.

Indoor Tanning Tax

The Health Care Reform Package imposes a 10 percent tax on qualified indoor tanning services effective for services provide on or after July 1, 2010.

Codification of the Economic Substance

The Reconciliation Act adds a revenue raiser that codifies the economic substance doctrine. Economic substance is a common law doctrine under which the tax benefits of a transaction are not permitted if the transaction does not have economic substance or lacks a business purpose. The provision in the Reconciliation Act requires a conjunctive analysis of economic substance under which taxpayers must show that (1) the transaction changes in a meaningful way their economic position apart from federal income tax effects and (2) they had a substantial purpose apart from federal income tax effects for entering into the transaction.

A 40 percent penalty applies to tax understatements attributable to undisclosed noneconomic substance transactions. The penalty is 20 percent if the transaction is adequately disclosed. The Reconciliation Act also renders the ability to obtain relief from accuracy-related penalties under the reasonable-cause exception inapplicable to noneconomic substance transactions.

The Joint Committee on Taxation projects that this provision will generate $4.5 billion over 10 years.

The courts have relied on the economic substance doctrine to distinguish abusive transactions from legitimate ones. The application of the doctrine is heavily dependent upon the facts and circumstances of a particular transaction. The codification of the economic substance doctrine adds some clarity but what remains to be seen is whether the codification will be more or less favorable to a transaction than the doctrine as historically applied

Disclaimer Required by IRS Rules of Practice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

This publication is intended for general information purposes. It does not constitute legal advice. The reader should consult with knowledgeable legal counsel to determine how applicable laws apply to specific situations. Articles in this publication are based on the most current information available at the time they were written. Since it is possible that the law and other circumstances may have changed since this publication, please call us to discuss any actions you may be considering as a result of reading an article.

© 2010 Law Office of Michael G. Lapidus. All rights reserved.

Michael G. Lapidus is the founder of the Law Office of Michael G. Lapidus. For tax controversy matters and business tax planning consulting needs, please contact Michael G. Lapidus at mlapidus@lapidustaxlaw.com.

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New IRS Guidance - The Small Business Health Care Tax Credit

Section 45R of the Internal Revenue Code ("Code") offers a tax credit to certain small employers including tax-exempt organizations that provide health insurance coverage to their employees. The credit is effective for taxable years beginning in 2010.

Section 45R was added to the Code by section 1421 of the Patient Protection and Affordable Care Act ("Affordable Care Act"), enacted March 23, 2010. In Notice 2010-44 recently issued by the IRS, the IRS provides guidance on section 45R and what requirements must be met to qualify for the credit. This article discusses these requirements as described in the Notice.

Employers Eligible for the Credit

An employer is eligible for the credit if (1) the employer has fewer than 25 full-time equivalent employees ("FTEs") for the taxable year, (2) the average annual wage of its employees for the year is less than $50,000 per FTE, and (3) the employer pays at least 50 percent of the premiums of the health insurance coverage for their employees. However, a federal or state employer is not an eligible small employer for purposes of the credit unless it is a section 501(c) non-profit organization.

Specifically, we can determine whether an employer is eligible for the credit by following the array of steps set forth in Notice 2010-44:

Determine the employees who are taken into account for purposes of the credit.

Determine the number of hours of service performed by those employees.

Calculate the number of the employer's FTEs.

Determine the average annual wages paid per FTE.

Determine the premiums paid by the employer that are taken into account for purposes of the credit.

Determining the Employees Taken into Account for Purposes of the Credit

Generally, employees who perform services for the employer during the taxable year are taken into account in determining the employer's FTEs, average wages, and premiums paid. However, certain individuals are not taken into account as employees for purposes of the credit.

Accordingly, their wages and hours are disregarded in determining the FTEs and average annual wages, and the premiums paid on their behalf are not counted in determining the amount of the credit. These excluded individuals include sole proprietors, partners in a partnership, shareholders owning more than two percent of an S corporation, and any owners of more than five percent of other businesses. Family members of these owners and partners are also not taken into account as employees. A family member is defined as a child, sibling, step-sibling, parent, step-parent, a niece or nephew, an aunt or uncle, or a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law. Any other member of the household of these owners and partners who qualifies as a dependent for tax purposes is not taken into account as an employee.

Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer more than 120 days during the taxable year.

Determining the Number of Hours of Service Worked by Employees for the Taxable Year

An employee's hours of service for a year include the following: (1) each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer during the employer's taxable year and (2) each hour for which an employee is paid, or entitled to payment, by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity including disability, layoff, jury duty, military duty, or leave of absence. Only a maximum of 160 continuous hours may be counted as hours of service worked by employees for periods of vacation, holiday, illness, or incapacity.

In calculating the total number of hours of service which must be taken into account for an employee for the year, the employer may use any of the following methods: (1) determine actual hours of service from records of hours worked and hours for which payment is made or due, (2) use a days-worked equivalency whereby the employee is credited with 8 hours of service each day, or (3) use a weeks-worked equivalency whereby the employee is credited with 40 hours of service for each week. The number of hours per employee cannot exceed 2,080 hours.

Calculating the Number of an Employer's FTEs

We demonstrate by example. Consider an employer during the 2010 taxable year who pays 5 employees wages for 2,080 hours each. The employer's FTEs would be calculated by multiplying 5 by 2,080 and dividing by 2,080, which equals 5 FTEs.

In some circumstances, an employer with 25 or more employees may qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and, therefore, may qualify for the credit.

Determine the Average Annual Wages Paid per FTE

We demonstrate by example. For example, during the 2010 taxable year, an employer pays $224,000 in wages and has 10 FTEs. The employer's annual wage paid per FTE is $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000).

Determining the Premiums Paid by the Employer for the Taxable Year

Only premiums paid by the employer for health insurance coverage are counted in calculating the credit. For example, if an employer pays 80 percent of the premiums for employees' coverage (with employees paying the other 20 percent), the 80 percent paid by the employer is taken into account in calculating the credit. In calculating the credit for a taxable year beginning in 2010, an employer may count all premiums paid by the employer during 2010, including premiums paid during 2010 before the Affordable Care Act was enacted.

Small businesses may receive the credit not only for regular health insurance but also for add-on dental and vision coverage.

The amount of an employer's premium payments that are taken into account in calculating the credit is limited to the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State in which the employer offers coverage were substituted for the actual premium. For example, if an eligible small employer pays 80 percent of the premium for coverage provided to employees (and employees pay the other 20 percent), the premiums taken into account for purposes of the credit are the lesser of 80 percent of the total actual premiums paid or 80 percent of the premiums that would have been paid for the coverage if the average premium for the small group market in the State were substituted for the actual premium.

Maximum Credit Amount and Credit Phaseout

For taxable years beginning in 2010 through 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible small employers that are tax-exempt organizations.

The maximum credit goes to smaller employers - those with 10 or fewer FTEs - paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more.

Michael G. Lapidus is the founder of the Law Office of Michael G. Lapidus. If you have any questions relating to the small business health care tax credit, have any business tax concerns, or are faced with a tax audit or IRS dispute, please do not hesitate to contact Michael G. Lapidus at mlapidus@lapidustaxlaw.com.

Disclaimer Required by IRS Rules of Practice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

This publication is intended for general information purposes. It does not constitute legal advice. The reader should consult with knowledgeable legal counsel to determine how applicable laws apply to specific situations. Articles in this publication are based on the most current information available at the time they were written. Since it is possible that the law and other circumstances may have changed since this publication, please call us to discuss any actions you may be considering as a result of reading an article.

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2009 Tax Deductible Limits For Long-Term Care Insurance Announced

The Internal Revenue Service (IRS) has announced increased deductibility levels for long-term care insurance policies purchased in 2009. To encourage individuals to purchase long-term care insurance the federal government and many states offer tax deductions and tax incentives that increase yearly.

Tax advantaged long-term care insurance is one of the few remaining significant tax-savings benefits for small business owners. "In certain situations, the cost of long-term care insurance can be fully tax deductible for the business. Even spouses can be covered under a tax-advantaged plan.

There is still time to take advantage of tax deductions in 2008 and also benefit from the increased deductible limits next year. The deductible limits under Section 213(d)(10) for eligible long-term care premiums includable in the term 'medical care' are as follows:

Eligible Long-Term Care Premiums - For taxable years beginning in 2009, the limitation under S 213(d)(10), regarding eligible long-term care premiums includible in the term "medical care" are as follows:

40 or less: $320
More than 40 but not more than 50: $600
More than 50 but not more than 60: $1,190
More than 60 but not more than 70: $3,180
More than 70: $3,980

There are also tax changes for periodic payments received under Qualified Long-Term Care Insurance contracts or certain life insurance contracts.

For calendar year 2009, the stated dollar amount of the per diem limitation under S 7702B(d)(4), regarding periodic payments received under a qualified long-term care insurance contract or periodic payments received under a life insurance contract that are treated as paid by reason of the death of a chronically ill individual is $280.

Annual Exclusion for Gifts - For calendar year 2009, the first $13,000 of gifts to any person (other than gifts of future interest in property) are not included in the total amount of taxable gifts under S 2503 made during that year. Source: IRS Revenue Procedure 2008-66

To find a comprehensive online directory of over 3,000 insurance professionals who can assist with your long-term care insurance needs, visit the Consumer Information Center of the American Association for Long-Term Care Insurance.

Jesse Slome is Executive Director of the American Association for Long-Term Care Insurance. The industry trade organization does not sell insurance products but maintains an excellent website for consumers seeking additional information on the subject. If you would like to receive a no-obligation free quote from a member of the Association, visit our Consumer Information Center.

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Higher Tax Deduction For Long-Term Care Insurance in 2010

Many Americans do a poor job of planning for their future. It's true. As a result an increasing number of individuals and families look to the federal and state government for solutions. Most often the solutions are insufficient.

That is why legislators at both the federal and state levels offer significant tax incentives to encourage Americans to plan. From tax deductions for retirement savings options to deductibility for home mortgages, all of these are ways government entities are giving people incentives to be self-sufficient,

As millions of Americans live longer lives, into their 80s, 90s and even beyond, the number of people needing long-term care continues to grow. Some 10 million Americans currently require long-term care services. Most force loved ones and family members into becoming their caregivers. Others are turning to taxpayers for aid.

Long-term care costs are now a significant budget line in many states. When dollars are spent caring for elderly, there are fewer dollars to pay for schools, police and the many other services a society requires. As a result, government officials have recognized the importance of educating Americans about the newfound need to plan for long-term care.

Tax-deductible retirement savings launched the 401(k) plan from relative obscurity into the most-popular way Americans save for retirement.

Tax-deductible LTC health insurance may do the same for the first generation of Americans who need to plan for living a long life.

Recognizing this fact, the Internal Revenue Service (IRS) has approved increased deductibility levels for insurance policies purchased in 2010 according to a just-issued report by the American Association for Long-Term Care Insurance, the industry trade group.

Some 8.25 million Americans currently own policies and several hundred thousand new individuals purchase protection each year according to the trade group. In addition to federal tax advantages, a number of states now offer tax deductions or credits to those who purchase LTC insurance protection. A credit is a dollar-for-dollar reduction in the actual cost of insurance.

Tax deductions are limited for individuals financial experts note. However, business owners may be able to fully deduct the cost for themselves and selected employees. In addition to the tax deductions, a number of insurers now are offering discounts to employers who offer coverage to as few as three employees.

There is still time to take advantage of tax deductions in 2009 and also benefit from the increased deductible limits for insurance next year. To accomplish this, the policy must be purchased prior to the close of the tax year and financial professionals recommend speaking to both your insurance and accounting professional.

The federal deductible limits under Section 213(d)(10) for eligible long-term care premiums includable in the term 'medical care' are as follows:

2010 Long-Term Care Insurance Deductible Limits
Attained Age Before Close of Taxable Year
40 or less: Deductible Limit: $ 330
More than 40 but not more than 50: $ 620
More than 50 but not more than 60: $1,230
More than 60 but not more than 70: $3,290
More than 70: $4,110

Source: IRS Revenue Procedure 2009-50 (2010 Limits)

Read all about tax deductible long-term care insurance on the American Association for Long-Term Care Insurance's website. The Association does not sell insurance products but works with several thousand insurance and financial professionals nationwide. Consumers should visit the Association's Consumer Tax Information Center to access free information. Insurance and financial professionals should visit the Association's Producer's Resource Center. Jesse Slome is Executive Director of the Association.

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Individually Owned Versus Employer-Based Health Insurance

I've been crusading for individual health insurance and ranting against employer-based coverage for years, because privately-owned coverage is exactly what America needs to put the kibosh on skyrocketing premiums, lack of portability, consumer ignorance (regarding medical costs) and the over-consumption (abuse!) of healthcare services.

Health insurance should never have been linked to employment in the first place. We don't expect employers to provide us with auto, homeowner's or life insurance, do we?

So how did we get into this mess?

Federal wage and price controls during World War II prevented employers from raising employee salaries...but not from increasing their "fringe" benefits. So companies started offering Health Insurance as a way to "sweeten the pie" in order to compete for employees. Plus, employers were allowed to write-off the premiums...and employees did NOT have to report their healthcare benefits as taxable income!

A very sweet pie, indeed!

The IRS resisted...but with millions of Americans now getting their health benefits tax-free through work...Congress eventually decided to permanently put the tax exempt-status of employer health insurance into law, and by the mid-1960s, employer-based health benefits were almost universal.

This is a classic example of how, according to Milton Friedman, one bad government policy leads to another.

With health benefits now tax-free (if employer-based), more and more Americans were signing up through work...and as income tax rates increased, so did the incentive to keep expanding health benefits. Americans who wouldn't think of using auto insurance to cover stuff like oil changes, tune-ups or gasoline...were beginning to get used to the concept of using health insurance to cover annual physicals, prescriptions and other low-cost, administrative intensive, routine expenses... contributing to a mucked-up healthcare system in which virtually every medical bill, regardless of how insignificant, is covered by a third party.

And with someone else picking up the tab, everybody got used to going to the emergency room for a sore throat, running to the doctor for the sniffles, buying brand-name vs. generic, and dangerously over-medicating, in general.

Is this beginning to NOT make sense to you?

When patients think that someone else is paying the bill (employees are really trading potentially higher wages for increasingly meaningless health benefits), they feel very little pressure to shop around and learn what those costs actually are...and providers feel very little pressure to compete with each other on price. As a result, prices keep rising, which causes health insurance to be more expensive, which causes people to become more worried about losing their insurance... and more dependent on the benefits provided by their employers!

Is there a way out of this living hell?

Yeah, sure, and it's got nothing to do higher taxes, more government spending, a weakened national defense or (gulp) SOCIALIZED medicine.

The key to reforming healthcare in the United States is "de-linking" health insurance from employment and fixing the tax code by taking the tax deduction away from employers and giving employees a refundable health insurance tax CREDIT...as a powerful and compelling incentive to buy their own private, portable, safer and more affordable health coverage.

As tens of millions of Americans begin focusing more on the true cost of insurance and medical services, price competition will kick in...and by liberating employers from the mounting anxiety and financial burden of being in the health insurance "business"...they will be in a position to pay their employees higher wages!

Mark Goldstein is president of The Producers Alliance, a national independent insurance marketing organization. His specialty is recruiting, training, and developing top producing independent health and life agents.

Mark was the number one health insurance producer for The National Business Association from 1995 through 1998 and the top agency manager for American Republic Insurance from 1999 through 2001, before launching The Producers Alliance... http://www.TheProducersAlliance.net in September of 2001.

Mark Goldstein can be reached at (877)442-0698 or by email at Mark@TheProducersAlliance.net.

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