The promised repeal and replacement of Obamacare (the Affordable Care Act) is in writing. Paul Ryan, Speaker of the House, introduced the American Health Care Act (AHCA) on March 7, 2017. The bill has a long way to go before it is law. But during our busy tax season, clients will have questions on how the proposal affects them and their family. Here are a few pointers:
1. The individual mandate and the employer mandate are repealed in the proposed legislation effective after 12/31/2015. Thus, there would be no penalties for failure to have health insurance or to provide health insurance beginning for the 2016 tax year. The retroactive date isn’t a problem for the employer, as employer mandate penalties are not self-assessed. The IRS bills the employer. For the individual with no insurance in 2016, the retroactive date poses a problem for us, the tax preparer.
- Planning. Shall we include the individual mandate penalty in the 2016 return or leave it off? First the easy (easier) answer. If the client owes money, file an extension and wait for the enactment of AHCA to confirm the effective date. If the client is receiving a refund and is willing to “gamble” that the effective date is indeed retroactive, file without the penalty but have the client sign that they understand that the penalty, plus interest, may later be assessed by the IRS. If there is a refund and the client doesn’t want to risk owing money later, advise the client that an amended return may be required after AHCA is finalized.
2. AHCA proposes the repeal of the 3.8% tax on net investment income effective for tax years beginning after 12/31/2017. The .09% additional Medicare tax is also repealed.
- Planning. Advise clients to delay sales of appreciated property until 2018. If the property must be sold in 2017, an installment sale may help delay the recognition of a gain until a later year. Payments on prior year installment sales should be delayed when possible to 2018.
3. Insurance companies must cover pre-existing illnesses at the standard premium rate UNLESS there is a break in coverage. If there is a lapse in coverage longer than 63 days and the taxpayer goes to the individual market later, insurers may charge a 30% premium surcharge for a full year. This would be effective for the 2019 plan year.
- Planning. Advise clients, especially those with pre-existing illnesses, that a break in coverage will be expensive.
4. The premium tax credit is repealed in the proposed legislation. It is replaced with a refundable tax credit based on age rather than income. ACA credits would be modified in 2018 and 2019. AHCA credits would replace ACA’s credits beginning in 2020.
Here’s the schedule of how much each age group would receive:
Under 30—$2,000 a year
Age 30 to 39—$2,500 a year
Age 40 to 49—$3,000 a year
Age 50 to 59—$3,500 a year
Age 60 and above—$4,000 a year
Note. AHCA credits would phase out as income exceeds $75,000 single ($150,000 MFJ). Total credits for a family would cap at $14,000.
- Planning. There are some winners and some losers in the proposed AHCA credit system. For example, the ACA premium tax credit applied only to an individual with income below 400% of the federal poverty level. Under AHCA, the credit begins to phase out at an income of $75,000 ($150,000 MFJ), resulting potentially in a higher subsidy. Kaiser Family Foundation compares the ACA credit and AHCA credit for a 40-year old:
5. ACA limited premiums that insurance companies could charge based on age to three times the standard rate. This limitation would be amended, allowing insurance companies to charge higher premiums equal to five times the standard rates to older enrollees beginning with the 2018 plan year.
- Planning. Advise older clients, particularly those in their 50s and 60s, that their health insurance premiums will likely increase under AHCA. Since AHCA bases its tax credits on age, some relief for those with income within the thresholds may apply.
6. Starting in 2018, taxpayers will be able to contribute more toward their out-of-pocket medical expenses in a tax-advantaged way. The ACA reduction for flexible spending plans would be repealed. Thus, employees could contribute $5,000 to an FSA rather than the current $2,500. Health savings account contributions would be increased to $6,550 for self-only coverage and $13,100 for family coverage. Current contributions are limited to $3,400 for self-only coverage and $6,750 for family coverage.
- Planning.Clients should be advised that additional contributions to an FSA or HSA will be available in 2018 if AHCA is passed.
There are many other proposed changes to the current health care law included in the AHCA. For a description of those, we will wait until the bill makes its way through the various committees and the House and Senate votes.
© 2017 Sharon Kreider & Vern Hoven