On March 6, 2017 Congress released summaries of the two bills designed to repeal and replace the Affordable Care Act (“Obamacare”). The health care provisions of the bills will maintain family coverage for children until they reach age 26 and continue to mandate pre-existing conditions coverage, among other things. This alert covers the highlights of the tax provisions.
As with any major legislative change, there will likely be several updates to the proposed policy, and we can expect political negotiations to be ongoing prior to the voting on the final legislation.
The increased Medicare Tax on Earned Income and Net Investment Income Tax will both be repealed as of January 1, 2018. These taxes currently increase the tax on earned income over threshold amounts by 0.9% and increase the tax on investment income of individuals, estates and trusts, exceeding specific income thresholds, by 3.8%.
Premium Tax Credits, which were the vehicle to provide financial assistance to lower income insureds, will be repealed as of December 31, 2019. The mechanism to recapture excess credits when a taxpayer’s income rises after credits are issued will continue through 2019.
Refundable Tax Credits will replace the Premium Tax Credits as the funding vehicle for individuals that do not have access to a government health insurance program or an employer sponsored plan. The credits, based on age, will range from $2,000-4,000 per individual with a $14,000 family cap. The credits will be phased out beginning at income levels of $75,000 for individuals and $150,000 for joint filers.
Individual and Employer Mandates, which created penalties for individuals that did not have minimum required coverage, and for employers who were required to provide health care coverage and did not, will both be repealed retroactively to January 1, 2016. Regarding the individual mandate, however, in order to discourage healthy people from dropping insurance, a new 30% penalty will be assessed against individual policy holders with lapses in coverage.
The “Cadillac Tax”, under current law, imposed a 40% excise tax on “lavish” plans, and was to go into effect in 2020. This tax would now only go into effect for taxable periods beginning after December 31, 2024.
Medical Expense deductibility will undergo several changes. In 2018, the threshold over which expenses must exceed to qualify as deductible will return to 7.5% of Adjusted Gross Income (“AGI”) from its current 10% threshold, for all taxpayers. The special 7.5% AGI threshold for taxpayers aged 65 or over will also be extended for the 2017 tax year. And, also effective for tax years beginning in 2018, the Obamacare tax on over-the-counter medications will effectively be repealed, regarding tax-advantaged health savings accounts.
Deductible contributions to both Health Savings Accounts and Flexible Spending Accounts will both increase beginning in 2018. The HSA basic limit would increase for self-only coverage to at least $6,550 and to $13,100 for family coverage. In addition, both spouses will be allowed to make catch-up contributions to one HSA. The FSA limit, currently at $2,600 will be repealed and will only be subject to any limitations as established by the employer’s plan.
Other notable changes, effective in 2018, include
- Repeal of the increased percentage of tax on distributions from an HSA or Archer MSA that are not used for qualified medical expenses. The percentages revert to 10% and 15%, respectively.
- Repeal of the 2.3% excise tax on the sale of certain medical devices.
- Repeal of the 10% sales tax on indoor tanning services.
Please keep in mind that these are currently proposed bills and not passed legislation. Citrin Cooperman Federal Tax Policy Team will follow the legislative process closely and keep our clients apprised of the potential changes and consequences of the tax proposals. We emphasize, however, that these changes are only proposals at this time and that there are other tax law change proposals being introduced by the members of Congress, which the Federal Tax Policy Team is following closely. If you have any questions regarding current or proposed policy, please do not hesitate to reach out to a FTPT advisor