Mar 29th 2012
Update: Today, March 30, US Supreme Court justices held closed-door deliberations on President Barack Obama's health care overhaul law. It is likely they cast their preliminary votes on how they will eventually rule. As the Supreme Court is known for keeping its secrets, no leaks are expected before formal opinions are written and announced from the bench. This is not expected until late June, when the court is set to go on its regular summer recess.
By Ken Berry
For three historic days this week, the nine justices of the US Supreme Court heard arguments concerning the constitutionality of the monumental health care legislation championed by President Obama in 2010. The law has been challenged by more than half of the states in the union - twenty-eight, to be exact. After taking a secret "straw poll," the judges are expected to bunker down for a couple of months before releasing a final decision before the court's July 4th recess.
The highest court in the land could conceivably strike down one or more of the 450 provisions in the Affordable Patient Protection and Care Act, invalidate the entire law, or let it stand as is. Most of the main provisions are slated to take effect over the next few years.
At the heart of the matter - and the lightning rod for much of the ongoing debate - is a virtual mandate for individuals to obtain health insurance. Beginning in 2014, those who don't qualify for Medicare or Medicaid must have at least "minimal essential coverage" or pay a tax penalty based on household income. The penalty is reduced for individuals under age eighteen and college students. Furthermore, various subsidies and credits will be available to low-income taxpayers, while early retirees may qualify for other assistance.
But individuals won't bear the entire financial burden of the health care law. Beginning in 2014, an employer with fifty or more workers failing to provide minimal essential coverage for its full-time employees will be assessed a tax penalty. The penalty is based on the number of workers (but the first thirty workers are exempt from the calculation). Employers will be assessed an extra penalty for waiting-period restrictions. And, the health care law adds new reporting requirements to the mix.
Another controversial provision in the law is a 3.8 percent Medicare surtax on the lesser of net investment income or modified adjusted gross income (MAGI) above $250,000 ($200,000 for single filers). This new surtax is scheduled to kick in next year. Furthermore, a second 0.9 percent Medicare surtax will be imposed on earned income above $250,000 ($200,000 for single filers). Combined with other tax hikes in 2013 - the highest marginal tax bracket will be 39.6 percent barring any new legislation - a taxpayer's top ordinary income tax rate could reach as high as 44.3 percent.
Other tax-based increases will be spread around for good measure. Beginning in 2014, insurers will have to pay a 40 percent penalty if premiums for so-called "Cadillac health plans" exceed certain levels. In addition, the health care law defines "medical expenses" for purposes of flexible spending accounts (FSAs) and comparable plans to conform to the definition for medical expense deductions, and it caps annual contributions to health care FSAs at $2,500, beginning in 2013. It also increases the threshold for claiming medical deductions from 7.5 percent of AGI to 10 percent, effective in 2013.
Undoubtedly, many of your clients will remain on edge until the Supreme Court hands down its verdict. In the meantime, here are some "talking points" to discuss:
Both individuals and businesses might shop around for improved or more affordable coverage. Discourage your clients from simply assuming that long-standing policies represent the optimal approach for their situation. Help them to explore alternatives that will put them in the best possible position for when, if ever, the health care mandates go into effect.
Advise clients how to prepare for the 3.8 percent Medicare surtax. For instance, if an investor expects to realize a large capital gain from a securities sale in the near future, he or she might realize the gain in 2012 instead of postponing it until 2013. Similarly, a taxpayer might avoid installment sale treatment by reporting all income from a real estate gain in 2012. In addition to the Medicare surtaxes and the tax rate hikes, the maximum tax rate on long-term capital gain is set to increase from 15 percent to 20 percent in 2013.
If there was ever a year to arrange non-emergency medical and dental procedures, this is it. With the threshold rising to 10 percent of AGI in 2013, it will become even more difficult to qualify for medical expense deductions. This year may be a client's best shot at a deduction, so it makes sense to accelerate exams and routine treatments into 2012, absent extenuating circumstances.
Don't forget about the health care credit for qualified small businesses. This credit first became available in 2010. For 2012, a business with no more than twenty-five full-time employees with average annual wages above $50,000 can claim a credit equal to 35 percent of the cost of its qualified employer contributions. If the business employs ten or fewer full-time employees with average annual wages of no more than $25,000, it may claim a 100 percent credit.
Circle the wagons until the final outcome is determined. Once the US Supreme Court rules on the health care law, you can help clients take appropriate action.