How to Begin to Prepare Your Clients for Changes to the Health Care Law.
The House of Representatives passed its version of a repeal and replacement of Obamacare. The American Health Care Act
is now in the Senate and it will be a long, arduous effort until the Senate passes a replacement bill. And then, it's on to reconciliation. In other words, it will be several months before the replacement legislation is final. But the expected delay won't stop clients from asking you questions about their health insurance prospects, as well as about tax planning.
Here are six tax changes in the House bill:
1. The individual mandate would be repealed.
2. The premium tax credit would be repealed, but not until 2020.
3. The employer mandate would be repealed.
4. The 3.8% tax on net investment income would be repealed, as well as the 0.09% Medicare tax on wages above $200,000 ($250,000 MFJ).
5. The medical deduction haircut would be reduced from 10% of AGI back to 7.5%.
6. The $2,500 cap on flexible spending accounts would be eliminated.
As you can see from this short and very straightforward list, it's likely that the final legislation will include each of these proposed changes in some manner or other. What tax planning advice can we offer in anticipation?
WARNING: Although the House bill makes most changes effective immediately, the final bill may not.
When the effective date of a repeal of the individual mandate is known, healthy individuals can drop their health insurance without fear of penalties, or at least they can hunt for "skinnier" and less expensive insurance. Sickly individuals will have premium subsidies for a few more years (2020 in the proposed legislation). Many elderly individuals will also benefit from a few more years of premium tax credits to provide temporary relief from an age-based premium increase allowed by the House bill. The Congressional Budget Office (CBO) estimates
that premiums for a 64-year-old earning $26,500 a year would increase by a startling $14,400 in 2026 under the House bill.
Planning. Employers who added a group health insurance plan because of Obamacare can drop their benefit plan or ask employees to pay a larger share of premiums. Obamacare's affordability requirement would disappear with the employer mandate. Because the House bill allows states to opt out of minimum essential coverage requirements and allows employers to do inter-state shopping for insurance, employers can look nationwide for cheaper plans with less coverage and thus pass more risk onto their employees.
Planning. The proposed repeal of the 3.8% tax on net investment income means that clients who would otherwise be subject to the tax should consider delaying sales of appreciated property until we know the repeal's effective date. Maybe an installment sale can hedge the bet, allowing the sale now but the taxable event in another year. An employee expecting a large bonus may want to delay it to save a little Medicare tax. Although we better remind clients about that old saying: "a bird in the hand is worth two in the bush".
Planning. Delaying medical and dental expenses until the bill is effective may result in little tax savings for some clients with medical above 7.5% of their AGI. If the employer and the employee respond to the effective date of the FSA change, the client with large out of pocket medical expenses may save taxes with the repeal of the $2,500 limit on FSAs. President Trump proposed in his tax reform brief that the medical expense deduction be eliminated. Thus, whether it is an Obamacare replacement or a tax reform proposal, the FSA is important tax planning advice.
The legislation that enacted Obamacare (the Affordable Care Act) is 2,700 pages. There are many, many provisions—tax and non-tax. Each can be a sticking point to final legislation including pre-existing conditions, minimum essential coverage, a state’s right to opt out, Medicaid expansion, etc. It will be a long haul until we know the final results.
Western CPE will keep you up to date on the progress of “repeal and replacement” and tax reform at our resort conferences and our fall tax update classes.