Monthly Archives: March 2010

Tax Changes in the New Health Care Act.

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A somewhat controversial bill passed the House this weekend that created a substantial number of changes in the tax laws.  This article will explain some of the new changes.  Keep in mind that this is a fluid situation, and things may change.  This article explains the tax provisions in the Patient Protection and Affordable Care Act, and does not cover the Reconciliation Act (which must now pass the Senate).  OK, let’s begin.

Credit for Individuals who Purchase Health Insurance through a State Benefit Exchange

To help people pay insurance premiums, the premium assistance credit is available for individuals with household incomes between 100% and 400% of the federal poverty level who do not receive health insurance through an employer or a spouse’s employer.  The premium assistance credit will be available after December 31, 2013.

An eligible individual will enroll in a plan offered through an exchange and report his income to the exchange.  Based on the information provided to the exchange, it will calculate the available credit.  Treasury will pay the credit directly to the exchange, and the individual is responsible for the balance of the premium.

If You Don’t Buy Health Insurance, You’ll Have to Pay an Excise Tax

The act requires individuals to maintain minimum amounts of health insurance coverage.  The penalty is $750 if the person does not have minimum coverage.  The fee for an uninsured person under age 18 will be half of the adult fee.  The total household penalty may not exceed 300% of the per-adult penalty.  The penalty will be phased in between 2014 and 2016.  The IRS cannot enforce payment of the penalty through liens and seizures or criminal penalties.

Small Business Credit

Small businesses (any business with 25 or fewer employees and average annual wages of less than $40,000) will be eligible for a credit of up to 50% of nonelective contributions made on behalf of employees for insurance premiums.  This credit is available for small businesses beginning January 1, 2010.

Reporting Requirement

The act requires insurers that provide minimum coverage to report information to both the covered individual and to the IRS.  This information is:

  • name, address, and SSNs of the primary insured, and others insured under the policy
  • the dates of coverage during the year
  • whether the coverage is a qualified health plan offered through an exchange
  • the amount of any premium tax credit
  • other information as the Secretary may require

Medical Care Itemized Deductions

Currently, medical expenses are deductible only to the extent that they exceed 7.5% of your adjusted gross income.  Under the new act, medical expenses must now exceed 10% of adjusted gross income to be deductible.

Increase to Medicare Tax

The Medicare portion of FICA is currently 1.45%.  The Medicare tax is increased by 0.9% for joint filers earning $250,000 and single filers earning $200,000 per year.  This provision takes effect January 1, 2013.

Employer Responsibility

A large employer (at least 50 full time employees during the preceding year) that does not

  • offer coverage for all its full time employees,
  • offer minimum essential coverage that is “unaffordable,” or
  • offer minimum essential coverage and the plan covers less than 60% of the cost of benefits,

is required to pay a penalty if the employee is certified as purchasing insurance through a state exchange AND the employee receives a premium assistance credit.

The penalty for any month is equal to the number of full time employees over a 30 employee base multiplied by one-twelfth of $2,000 (i.e., maximum $2,000 per employee per year).

Fees on Health Plans

This fee is equal to $2 multiplied by the average number of lives covered by the policy per year.

Cadillac Tax

The tax is equal to 40% of the cost of an insurance policy over a threshold amount.  For 2018, the threshold amount is $10,000 for individual coverage and $27,500 for family coverage, multiplied by the health cost adjustment percentage (defined in the act) and increased by the age and gender adjusted excess premium amount (as defined in the act).   Got that?

Miscellaneous Taxes

10% tax on indoor tanning.

Currently, HSA distributions that are not used to pay medical expenses are subject to a 10% penalty.  The act increases the penalty amount to 20%.

The adoption credit has been increased to $13,170 per eligible child, and is now a refundable credit.

I don’t know about you, but I have a headache.  Before I lie down for a nap I want to mention again that this is a fluid situation, and the Reconciliation Act has not yet passed the Senate.  My intention here is to give you a glimpse of the upcoming tax law changes.

Fine Print: This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

New Law Allows Life Insurance to be Exchanged for Long Term Care Insurance

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If you’ve ever exchanged one life insurance policy for another, you know that you are not usually taxed on the transfer.  This is because of a special provision in the tax code (Section 1035) that prevents gains from being recognized on such an exchange. 

If this provision did not exist, you would be taxed on the excess of

  • the cash value of your policy over
  • the accumulated premiums you’ve paid in (minus tax-free distributions)

Starting January 1, 2010 no gain or loss will be recognized on the exchange of:

  • a life insurance contract for a qualified long term care insurance contract
  • an endowment insurance contract for for a qualified long term care insurance contract
  • an annuity contract for a qualified long term care insurance contract
  • a qualified long term care insurance contract for another qualified long term care insurance contract

This provision was added by the Pension Protection act of 2006 (and it only took four years to take effect!).

Long term care insurance cannot be exchanged (tax-free) for any of the above insurances (an exchange will tax be free only into long term care insurance, not from long term care insurance).

This new law presents a great opportunity to fund a long term care insurance contract. 

Care must be exercised to execute an effective tax-free exchange. Normally, the transfer must occur directly between the two insurance companies. If the taxpayer receives a check for the replaced policy, a surrender may be deemed to have occurred, even if the check is immediately endorsed over to the new insurance company. Insurance companies typically help taxpayers execute tax-free exchanges. The insurance company whose policy is exchanged must issue the taxpayer a Form 1099-R showing the transaction to be a Section 1035 tax-free exchange.

So, what is qualified long term care insurance.  Well, the long term care policy must provide coverage only for long-term care services, be guaranteed renewable, have no cash value, and use refunds or dividends only to reduce future benefits. A qualifying policy does not cover expenses eligible for Medicare reimbursement unless Medicare is a secondary payer or the policy pays a per diem benefit without regard to actual expenses. In addition, certain consumer protection standards must be met.  Glad you asked?

Fine Print: This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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