Maybe I’m jumping the gun on this, as there’s still a little bit of Congressional back-and-forth due before Obama can put his name on the dotted line, but here’s what I’ve been able to discern about the impact of the recent health care industry legislation on tax resisters like you and me:
- The plan gives a lot of enforcement responsibility to the Internal Revenue Service without actually budgeting the agency any more money or personnel. Looking into the crystal ball, I see that there’ll be some effort in the future to beef up the agency so that it can better handle these new responsibilities. Peering closer, I think I discern that the agency won’t get nearly enough to cover the expenses of the new mandates, and so agency service, and its ability to go after tax delinquents, will probably further decline.
- The bill encourages the founding of new non-profit health insurance issuers. These issuers will be exempt from federal income tax. Such tax-exempt, non-profit health insurers exist today, but are fairly rare. A good analogy here is the credit union: as credit unions are to banks, these new non-profit health insurance issuers will be to ordinary health insurance companies. They will take the form of member-run cooperatives. (This starts now.)
- A new health coverage tax credit is part of the bill. This is a refundable credit for 80% of the cost of health insurance coverage, but it is only available to a small subset of taxpayers (“individuals who receive a trade adjustment allowance (and individuals who would be eligible to receive such an allowance but for the fact that they have not exhausted their regular unemployment benefits), individuals eligible for the alternative trade adjustment assistance program, and individuals over age 55 who receive pension benefits from the Pension Benefit Guaranty Corporation” who are not covered by Medicare or employer-subsidized plans). (This starts in .)
- There is also a new “premium assistance credit” — also a refundable tax credit — for people who get their health insurance via an exchange (the “exchange” model is also created by this legislation). This credit, oddly, goes straight from the government to the insurer as a way of subsidizing your purchase of health insurance. The amount the insurance company will get is based on your tax return from two years back, but the actual credit you qualify for will be based on your financial circumstances in the year you get the credit, so you’ll have to rectify this one way or the other on your tax return. The credit amount is based on your income, and is only available to households whose cumulative modified adjusted gross income puts them between 100% and 400% of the poverty line for their household type. (This all starts in .)
- There is also a new subsidy for households in the 100–400% of the poverty line range who purchase high-deductible health plans. These are the sorts of plans that qualify for Health Savings Accounts, but I’m not entirely sure of all of the ways the new law affects the old Health Savings Accounts scheme. Assuming such accounts are still a good tax shelter, the new law may make them more attractive to people with low-incomes who might otherwise have been frightened off by the high deductible. (This starts now.)
- Beginning in , all Americans will be required to carry some minimum amount of health insurance. The way this will be enforced is through the tax code: there will be a federal excise tax on non-insured people, payable by those people. As with the social security system, the Amish managed to finagle themselves a conscientious objection provision. This tax will be 2.5% of income above the standard-deduction/personal-exemption filing threshold, or a fixed amount: $95 per uninsured person in , $325 per in , $695 per in , and then indexed for inflation thereafter (whichever is higher). If the cheapest health insurance you can find still costs more than 8% of your household income, you’re off the hook for this excise tax; you are also off the hook if you make so little income that you aren’t required to file an income tax return, if your lapse of required coverage was less than three months long, or if you are a resident of a United States possession (e.g. Guam). I’m not the first to notice that for many people the cost of this excise tax will be far less than the cost of the insurance. Weirdly, although this excise tax will be figured on your income tax return and will be part of your total tax burden for the year, the law specifically forbids the IRS from using its ordinary tools of liens, seizures, criminal & civil penalties, or interest in pursuit of unpaid amounts. This will probably confuse the hell out of them and make a lot of work for their CoBOL team. Also, it makes tax refusal a profitable no-brainer, as without penalties and interest, the unpaid amount will be eroded by inflation from year to year.
- Starting in , health insurers will have to submit information to the IRS about all the people who have health insurance coverage with them, including contact information, the taxpayer identification (usually social security) number, details on the coverage, and “such other information as the Secretary may require.” This could be a snag for non-filers who are trying to stay off of the IRS radar.
- There is a new tax attached to most health insurance plans. It starts at $2 per covered person in , and then rises each year based on the rise in the cost of health expenses. There is also a new tax on health insurance companies, starting in . You won’t pay these taxes directly, but indirectly via the cost of your health insurance. The same sorts of insurers that are exempt from federal income tax will also get a reduction, though not an exemption, in the tax they pay here.
- So-called “cadillac” high-end health insurance and reimbursement plans are heavily taxed to the extent that their benefits exceed a threshold that is calculated according to a formula that caused my eyes to glaze over and made me want to do anything besides think about it. This won’t kick in until , by which time some subsequent Congress will probably have mucked with it, so it’s not worth paying much attention to anyway.
- If you’ve gotten used to being able to pay for over-the-counter drugs with your Health Savings Account, Health Reimbursement Account, or Health Flexible Savings Account (“cafeteria plan”), you’ll be disappointed to find that, starting next year, you can only purchase prescription drugs (or insulin) this way. Furthermore, the penalty for taking withdrawals from your Health Savings Account for non-authorized purposes has been increased to 20% of the amount.
- There’s a new tax on drug manufacturers and importers, with the proceeds designated for the Medicare trust fund. This starts in . There is also a tax on medical devices (though not things like eyeglasses and hearing aids that are generally purchased by ordinary schmoes like you and me).
- If you are unfortunate enough to have medical expenses that exceed 7.5% of your adjusted gross income in any particular year, you have been able to take any amount over 7.5% as an itemized deduction. Starting in , you’ll have to be even more unfortunate, as this threshold will increase to 10%, with some exceptions.
- There’s a new 10% tax on the price of indoor tanning services, starting in the second half of this year.
- Self-employed people have been able to take an above-the-line deduction for the cost of health insurance for themselves and their dependents. Under the new law, a dependent can include a child as old as 26 (before, the child had to be under 19, or under 24 and a full-time student).
- Those of you lucky enough to be living off of your investments rather than from earned income have been exempt from paying social security and medicare taxes on your income. No longer. As of , you have to pay a 3.8% medicare tax on such unearned income to the extent that you rake it in above a certain threshold amount.
- There is something called the “economic substance doctrine” that says that if a business engages in some complex economic transaction whose only effect is to lower the amount of taxes due by qualifying for the literal provisions of the tax code, without there being any other good reason for doing the transaction, then the business shouldn’t be able to take advantage of those tax benefits. This doctrine, though, is more a matter of custom than of law, and plenty of folks think that the letter of the law, and not its less-discernible spirit, ought to apply. This new bill tries to codify this doctrine and make it explicit and more uniformly-enforceable. I expect that this will make a lot of lawyers very busy. Since Congress deliberately uses the tax code as a prod to try to influence people and businesses to make certain decisions that they would otherwise not make for ordinary economic reasons (indeed this very bill is full of such provisions), this is weirdly schizophrenic.
