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8 Key Tax Changes in the Senate Healthcare Bill

Jul 3rd 2017
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Now it’s the Senate’s turn to take a whack at repealing and replacing Obamacare.

Not surprisingly, the new healthcare legislation being crafted by GOP leaders in the Senate – the Better Care Reconciliation Act of 2017 – would eliminate or delay tax revenue-raisers authorized by the Affordable Care Act (ACA). According to a Tax Foundation analysis, the proposed bill, as it currently stands, would cut taxes by more than $700 billion.

Many of the tax changes are consistent with the healthcare bill that narrowly passed the House in May, but some have different effective dates. Generally, the Senate provisions would take effect immediately in 2017. Also, certain provisions are industry-specific, such as repeals of taxes on tanning salons and manufacturers of medical devices.

Keeping that in mind, here’s a list of eight key items that could be important to a wide array of individuals and businesses:

1. Individual health insurance mandate. Under the ACA, a penalty is imposed on individuals who fail to obtain minimum essential health insurance coverage. It is generally equal to the higher of an amount based on 2.5 percent of household income or $695 per adult ($347.50 per child under 18), up to a maximum of $2,085.

The Senate’s healthcare bill would repeal the individual mandate.

2. Employer health insurance mandate. Similarly, businesses with more than 50 full-time employees are currently required to offer at least minimum health insurance to eligible workers – or pay a penalty. The penalty is generally equal to $2,260 divided by 12 for each month an employer fails to provide coverage, multiplied by the number of eligible employees (minus the first 30 employees).

This requirement would also be repealed.

3. Premium tax credits. If a low-income taxpayer qualifies, he or she can use premium credits to offset the cost of acquiring health insurance. More than half of the taxpayers enrolled through the Obamacare exchanges benefit from this tax break.

Republican leaders in the Senate want to replace these credits with a different form of subsidies based on income, age, and the cost of insurance. 

4. Net investment income tax. A 3.8 percent tax is applied to the lesser of a person’s net investment income (NII) – including capital gains, dividends, interest, and most other investment earnings – or modified adjusted gross income above $200,000 for single filers and $250,000 for joint filers.

The NII tax is a prime target of legislators and would be repealed. 

5. Additional payroll tax. Employers are now required to tack on an extra 0.9 percent payroll tax on wages and salaries above $200,000 for single filers and $250,000 for joint filers.

This tax would be completely wiped out by the Senate bill, but the repeal would not take effect until 2023.

6. Spending accounts. Several ACA provisions place restraints on spending of funds in tax-favored accounts, like flexible spending accounts, Archer medical savings accounts, and health savings accounts (HSAs). All these restraints would be lifted under the Senate’s proposal.

As with the House bill, the Senate bill also includes certain enhancements for HSAs. The effective dates for these changes are 2017 or 2018.  

7. Medical expense deduction. The ACA raised the deduction threshold for medical expenses from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. (Individuals age 65 or older received a reprieve through 2016.)

The Senate bill would restore the lower 7.5 percent threshold for all taxpayers, beginning in 2017, in contrast to the 2018 effective date under the House bill.

8. “Cadillac tax.” Finally, the dreaded “Cadillac tax” for top-of-the-line health insurance plans, which was already postponed from 2018 to 2020, would be delayed again. Under this provision, employers are taxed on premiums exceeding $10,200 for individual policies and $27,500 for family plans.

While the House bill postpones the effective date of the Cadillac tax until 2025, the Senate version adds another year, taking it to 2026.

Of course, the new bill is hardly a “done deal,” nor is enactment of any healthcare legislation in the immediate future. Nevertheless, these tax provisions are on the chopping block one way or another.

We will continue to monitor the latest developments in our nation’s capital.

Related articles:

The Tax Implications of the Senate Healthcare Bill
Proposed Health Bill Axes Many ACA Tax Provisions

Replies (1)

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Brett Layton, CPA
By bltaxes
Jul 10th 2017 22:49 EDT

We are all hoping the 3.8% tax goes away...

Thanks (1)