2. Understanding the Key Tax Implications of the New Health Care Laws and the Looming Tax Increases in 2013
Presented by:
Rebekah A. Flanders, cpa & Shawn M. Firster, cpa
Grossman Yanak & Ford LLP
Three Gateway Center, Suite • Pittsburgh, PA • •

3. Understanding the Key Tax Implications of the New Health Care Laws

4. Introduction

5. The new laws are encompassed in two separate pieces of legislation:
Patient Protection and Affordable Care Act (referenced as PPACA)
Health Care and Education Reconciliation Act (referenced as HCERA)

6. The provisions addressed herein will not be segregated by their specific legislation The two laws will simply be referred to together in today’s presentation as the “Health Care Act” or “HCA”

7. Constitutional challenge turned back on June 28, 2012, in a 5-4 Supreme Court Case
National Federation of Independent Business et al. vs. Sebelius, SC8.,
Thus, the law was upheld

8. PPACA signed into law by President Obama in March 2010
Numerous federal government agencies, including the Internal Revenue Service, Department of Labor, and the Department of Health and Human Services, have issued guidance and regulations since the bill was signed into law

9. What should business owners do in response to the law and the Supreme Court decision?
No choice… but to comply

10. Focus in this program is on the tax provisions related to the health care laws only
Compliance with the many non-tax provisions of the law are beyond the scope of this presentation

11. Commentators in the tax community have noted that the tax provisions added or amended by the HCA make this legislation the most expansive revision of tax laws in more than two decades!

12. A descriptive adjective for the tax provisions of the HCA would not include the word, simple

13. The key provisions of the legislation can be broken down into two broad categories
Business Provisions
Individual Provisions

14. Business Provisions

15. Employer Shared Responsibility Provision
The “Employer Mandate”
“Applicable large employer” may be subject to a shared responsibility payment

16. Employer Shared Responsibility Provision
May apply if:
Any full-time employee is certified to receive an applicable premium tax credit or a cost-sharing reduction payment

17. Employer Shared Responsibility Provision
Only occurs when:
Employer does not offer full-time employees (and dependents) the opportunity to enroll in minimum essential coverage; or
Minimum essential coverage is unaffordable (based on income) or does not provide minimum value

18. Employer Shared Responsibility Provision
What is minimum value?
Employer plan does not pay at least sixty percent (60%) of the total allowed costs

19. Employer Shared Responsibility Provision
Applicable Date
For all months beginning after December 31, 2013

20. Employer Shared Responsibility Provision
Definition of “applicable large employer”
Employs fifty (50) or more full-time employees (on average) on business days during the preceding calendar year

21. Employer Shared Responsibility Provision
Definition of “full-time employee”
One who works, on average, at least thirty (30) hours per week

22. Employer Shared Responsibility Provision
Many interpretive details remain open and continue to be addressed by IRS Notices and interpretive guidance

23. Small Employer Health Insurance Credit
A credit of up to thirty-five percent (35%) of health in- surance premiums paid by small business employers

24. Small Employer Health Insurance Credit
Credit is already in place and is applicable to years at current maximum credit rate (35%)

25. Small Employer Health Insurance Credit
Credits versus deductions
A credit represents a dollar-for-dollar reduction against tax, while a deduction reduces taxpayer’s or employer’s taxable income, on which the tax is calculated

26. Small Employer Health Insurance Credit
Qualified employer
Fewer than twenty-five (25) full-time equivalent employees for the year;
Average annual wages must be less than $50, per employee;
A qualifying arrangement must be maintained

27. Small Employer Health Insurance Credit
Only a very small percentage of the eligible companies claimed the credit in 2010

28. Small Employer Health Insurance Credit
Employees, for these purposes, do not include:
Sole proprietors
Partners
Greater-than-2% shareholders in an S Corp.
Owners of more than 5% of other business entities
Spouses and family members

29. Small Employer Health Insurance Credit
IRS Notice provides information on calculating the credit
Information and the credit calculation provided to the IRS on Form 8941, “Credit for Small Employer Health Insurance Premiums”

30. Small Employer Health Insurance Credit
To obtain maximum credit:
Company/employer cannot exceed the equivalent of 10 (ten) full-time employees (25 FTEs maxi- mum to qualify)
Maximum salary cannot exceed $25, ($50,000 maximum salary to qualify)

31. Small Employer Health Insurance Credit
Qualifying arrangement
Any scenario in which the employer pays a uniform percentage (not less than 50%) of the premium cost of health insurance coverage

32. Small Employer Health Insurance Credit
IRS set a cap, by state, on employee and family insurance premiums eligible for the credit
Pennsylvania: Employee Family $5,039 $12,471

33. Small Employer Health Insurance Credit
Exceeding the caps will serve to reduce the maximum credit allowed under the provision

34. Small Employer Health Insurance Credit
Credit calculation
If fewer than ten (10) full-time equivalent employees, average salaries of $25,000 or less, and a qualified arrangement is in place, then
the credit is thirty-five percent (35%) of total eligible insurance premiums paid

35. Small Employer Health Insurance Credit
Unused credits can generally be
Carried back one (1) year, and
Carried forward twenty (20) years

36. Small Employer Health Insurance Credit
This credit increases to fifty percent (50%) for years beginning after December 31, 2013

37. Cafeteria Plan Offering Qualified Health Plans in an Exchange
For 2014 and forward, a cafeteria plan will not be permitted to offer a qualified health plan offered through an American Health Benefit Exchange

38. Flexible Spending Arrangements
For 2013 and forward, the HCA limits contributions to $2,500, down from an overall $5,000 limitation
The amount of the limitation will be adjusted annually for inflation

39. Medical Expense Definitions
HCA changes the definition of medical expenses for:
Health Flexible Spending Arrangements
Health Reimbursement Arrangements
Health Savings Accounts
Archer Medical Savings Accounts

40. Medical Expense Definitions
Generally, changes are effective for 2011 and beyond
Example:
Amounts spent for medicine or drugs are reimbursable as medical expenses only if spent on a “prescribed drug” or insulin

41. Simple Cafeteria Plans
For 2011 and forward, HCA provides a simple cafeteria plan for small businesses
Inclusive of non-discrimination safe harbor requirement

42. Simple Cafeteria Plans
To qualify, the employer must:
Have an average of one hundred (100) or fewer employees on business days in either of the preceding two (2) years

43. Other Business Provisions
Reporting
Form W-2 disclosure
Exception for employers with fewer than 250 Forms W-2

44. Other Business Provisions
Must file annual information returns:
Health insurance carriers
Sponsors of self-insured plans
Government agencies administering plans
Other entities providing minimum essential coverage

45. Prescription Drug Subsidy for Retirees
A subsidy of twenty-eight percent (28%) of covered prescription drug costs is available to employers sponsoring group health plans with drug benefits for retirees
Medicare Prescription Drug, Improvement and Modernization Act of 2003

46. Prescription Drug Subsidy for Retirees
HCA requires the business deduction for retiree prescription drug costs to be reduced by the amounts of subsidy payments received under the 2003 Act
Effective for 2013 and forward

47. High-Cost Coverage Excise Tax
Effective in 2018 and beyond, an excise tax of forty percent (40%) will be applied to employer-sponsored health insurance coverage where annual premiums exceed a threshold amount

48. High-Cost Coverage Excise Tax
Threshold dollar limits (2018):
Employee only: $10,200 multiplied by the “health cost adjustment percentage”
Family: $27,500

49. Individual Provisions

50. Minimum Essential Health Coverage
Individual mandate
Applicable individuals must obtain “minimum essential health coverage” or be subject to a shared responsibility penalty for each month of non-coverage

51. Minimum Essential Health Coverage
Individual mandate
Effective for 2014 and forward

52. Minimum Essential Health Coverage
Generally includes:
Coverage under an eligible employer- sponsored plan, an individual market plan, a grandfathered plan, Medicaid and Medicare, among others

53. Minimum Essential Health Coverage
Penalty calculation
The greater of a flat dollar amount or a calculation based on a percentage of the taxpayer’s household income
Assessed/imposed monthly

54. Premium Assistance Tax Credit
Eligible low-income individuals who obtain health coverage under a qualified health plan through an insurance exchange may qualify for this credit

55. Premium Assistance Tax Credit
Limitation
Credit is not available if the individual is eligible for other essential minimum coverage, including employer-sponsored coverage that is affordable and provides minimum value

56. Premium Assistance Tax Credit
Affordable
A plan is affordable if the premiums paid by the employee for self-coverage do not exceed the required contribution percentage of the taxpayer’s household income (9.5% for 2014)

57. Premium Assistance Tax Credit
Minimum value
A plan fails to provide minimum value if it provides less than sixty percent (60%) coverage of the total allowed costs

58. Premium Assistance Tax Credit
Eligibility for credit
Determined by the relationship of the taxpayer’s household income to the federal poverty level (FPL)
Income must be at least 100%, but less than 400% of FPL

59. Medical Deduction Threshold
The itemized deduction threshold of 7.5 percent of adjusted gross income is increased to 10 percent for and beyond
If a taxpayer turns 65 before January 1, 2013, the old threshold (7.5 percent) will be in place until 2016

60. Additional Tax on HSA/MSA Distributions
If not used for qualified medical expenses, distributions are included in ordinary income and subject to an additional tax (penalty)
After 2010, the additional tax goes from 10 percent to 20 percent for HSAs and from 15percent to 20 percent for MSAs

61. Additional Medicare Tax
For tax years beginning in 2013, an additional .9 percent Medicare tax is imposed on wages and self- employment income of higher-income taxpayers
Applies to individuals with salary, wages, etc. in excess of $200,000; married couples, $250,000

62. Investment Income Taxation Increase
HCA adds an additional Medicare tax of 3.8 percent on “unearned income” effective for 2013 and beyond

63. Investment Income Taxation Increase
The tax is imposed on the lesser of:
An individual’s net investment income for the tax year, or
Modified adjusted gross income in excess of $200,000; $250,000 for married couples

64. Investment Income Taxation Increase
Net investment income is gross income from:
Interest, dividends, annuities, royalties and rents,
Gross income from any passive trade or business, and
Net capital gains

65. Dependent Coverage Until Age 26
HCA requires extended coverage until a dependent reaches age 26

66. Dependent Coverage Until Age 26
Grandfathered group plans are not required to offer dependent coverage if a young adult is eligible for group coverage outside his/her parent’s plan
Effective for plan years beginning before January 1,

67. Summary

68. The reach and breadth of the HCA provisions is very broad and, without question, will require most affected companies to seek outside assistance to ensure compliance

69. Looming Tax Increases: Expiring Tax Cuts, Estate Tax, Income & Capital Gains Rates

70. Introduction

71. “Fiscal Cliff” The most compelling issue facing Congress
Without legislative action, most tax cuts enacted since 2001 will expire on January 1, 2013, raising tax rates, reducing deductions and credits, and exposing millions of taxpayers under the alternative minimum tax (AMT)

72. Tax Policy Institute (TPI) statistics:
If Congress fails to act on expiring tax cuts by the end of 2012, nine out of 10 Americans will see their taxes go up; average households would see a $3,500 increase
The estate tax would hit more than 10 times as many estates as in 2012

73. Tax Policy Institute (TPI) statistics:
The 2% cut in the payroll tax rate would lapse, raising taxes on more than 120-million households
Short-term tax breaks that Congress regularly renews, some of which have already lapsed, would disappear, boosting taxes for both individuals and businesses

74. Tax Policy Institute (TPI) statistics:
In addition, the 2010 healthcare legislation would impose new taxes on high-income taxpayers

75. Return to Recession?
The resulting macroeconomic tightening could push the country back into recession in 2013, according to a report by the Congressional Budget Office

76. Candidate and Legislative Proposals
Both Presidential candidates favor a reduction in tax rates in the mid-term, to be followed by more comprehensive tax reform in the long-term
Obama: tax cuts for all but the wealthiest taxpayers
Romney: maintain Bush tax cuts for all taxpayers, while reducing or eliminating certain deductions

77. Individual Tax Rates, Deductions and Credits

78. Individual Tax Rates, Deductions and Credits
Under current law, the reduced individual income tax rates are scheduled to sunset after 2012

79. Individual Tax Rates, Deductions and Credits
Unless extended, individual marginal tax rates on ordinary income will rise for tax years beginning after December 31, 2012

80. Ordinary Income Tax Rates
2012
2013
35.0%
39.6%
33.0%
36.0%
28.0%
31.0%
25.0%
15.0%
10.0%

81. Individual Tax Rates, Deductions and Credits
President Obama, in his Blueprint for America and other proposals, has called for making permanent the 10, 15, 25, and 28 percent rates for tax years beginning after December 31, 2012 for all but the wealthiest taxpayers ($200K/$250K thresholds)

82. Individual Tax Rates, Deductions and Credits
Similar to the favorable graduated rate schedule, under current law, there is no marriage penalty or personal exemption limitation through 2012

83. Individual Tax Rates, Deductions and Credits
Numerous proposals favor extension of the penalty relief for all but the wealthiest taxpayers, though Republicans proposals would retain this benefit for all taxpayers

84. Individual Tax Rates, Deductions and Credits
Under current law, the Earned Income Credit and the Child Tax Credit are enhanced through 2012
Both candidates for President have advocated an extension of both enhancements

85. Individual Tax Rates, Deductions and Credits
15% rate bracket for married filers:
Current law: No marriage penalty
January 1, 2013: Marriage penalty

86. Individual Tax Rates, Deductions and Credits
Capital gains rates for individuals
Current law: Generally 15% (or 0%)
January 1, 2013: Generally 20%

87. Individual Tax Rates, Deductions and Credits
Qualified Dividends
Current law: Generally 15% (or 0%)
January 1, 2013: Ordinary income

88. Individual Tax Rates, Deductions and Credits
Medicare Tax on Investment Income
Current law: None
January 1, 2013: Additional 3.8% on the lesser of net investment income or Modified AGI in excess of $200,000 ($250,000 for married taxpayers)

89. Individual Tax Rates, Deductions and Credits
What is Investment Income?
Interest, dividends, annuities, rents & royalties, nonbusiness gains, and other passive income

90. Individual Tax Rates, Deductions and Credits
Additional Medicare Tax
Current law: None
January 1, 2013: Additional 0.9% on wages and self-employment income of higher-income taxpayers (single $200,000; married $250,000)

91. Individual Tax Rates, Deductions and Credits
Dependent care credit
Current law: 35% credit
Limit - $3,000/$6,000 (phase-out at $15,000)
January 1, 2013: 30% credit
Limit - $2,400/$4,800 (phase-out at $10,000)

92. Individual Tax Rates, Deductions and Credits
Child tax credit
Current law: $1,000 per child, offsets AMT
January 1, 2013: $500 per child, no offset AMT

93. Individual Tax Rates, Deductions and Credits
American opportunity tax credit
Current law: Max is $2,500
Partially refundable, available first four years
January 1, 2013: Hope credit (max TBA)
No refund, available 2 years

94. Individual Tax Rates, Deductions and Credits
Energy credit – home construction
Current law: No credit
Expired for homes acquired after 12/31/11
January 1, 2013: No credit

95. Individual Tax Rates, Deductions and Credits
Credit for energy-efficient appliances
Current law: No credit
Expired after 2011
January 1, 2013: No credit

96. Individual Tax Rates, Deductions and Credits
Work opportunity tax credit
Current law: 40% through end of 2011
2012 for veterans
January 1, 2013: Credit for certain veterans hired through 2012

97. Individual Tax Rates, Deductions and Credits
Refundable minimum tax credit for individuals
Current law: Long-term credit
Unused credit through 2012
January 1, 2013: No credit

98. Individual Tax Rates, Deductions and Credits
AMT exemption amount
Through 2011: Generally indexed; one-year patches
January 1, 2013: $45,000 joint/$33,750 single filers

99. Individual Tax Rates, Deductions and Credits
AMT exemption
2011 exemption amounts:
$48,450 for unmarried individuals filing a single return
$74,450 for married couples filing a joint return and surviving spouses

100. AMT Example
Regular Tax
AMT (No Exemption
AMT With Exemption
Income
80,000
S&L Taxes/EB Expenses
-20,000
Exemption
-33,750
Taxable Income
60,000
46,250
Tax Rate
30%
28%
Tax
18,000
22,400
12,950
AMT
4,400
Total Tax

101. AMT Patch Example
Regular Tax
AMT (Old Exemption)
AMT With Patch
Income
200,000
S&L Taxes/EB Expenses
-50,000
Exemption
-33,750
-48,750
Taxable Income
150,000
166,250
151,250
Tax Rate
30%
28%
Tax
45,000
46,550
42,350
AMT
1,550
Total Tax

102. Individual Tax Rates, Deductions and Credits
School teacher deduction
Current Law: Deduction through 2011
January 1, 2013: No deduction

103. Individual Tax Rates, Deductions and Credits
Overall limit on itemized deductions
Current Law: No limit
January 1, 2013: 3% rule applies

104. Individual Tax Rates, Deductions and Credits
Discharge on principal residence debt
Current Law: Not income for pre discharges
January 1, 2013: Discharge is taxable

105. Individual Tax Rates, Deductions and Credits
Flexible spending accounts
Current Law: Generally no limit on contributions
January 1, 2013: $2,500 annual limit

106. Individual Tax Rates, Deductions and Credits
Employer education assistance
Current Law: $5,250 exclusion through 2012
January 1, 2013: No exclusion

107. Individual Tax Rates, Deductions and Credits
Phase-out personal exemptions
Current Law: No phase-out
January 1, 2013: Phase-out at higher income levels

108. Individual Tax Rates, Deductions and Credits
State and local sales tax deduction
Current Law: Expired in 2011
January 1, 2013: None

109. Individual Tax Rates, Deductions and Credits
15-Year Depreciation of Qualified Leaseholds and Certain Retail Realty
Current Law: Expired in 2011
January 1, 2013: 39 years

110. Individual Tax Rates, Deductions and Credits
Bonus depreciation
Current Law: 100% in 2011; 50% in 2012
January 1, 2013: No bonus (except certain long-lived property)

111. Individual Tax Rates, Deductions and Credits
Section 179
Current Law: $500,000 ($2M investment limit) in 2011; $139,000 ($560,000 invest- ment limit) in 2012
January 1, 2013: $25,000 max ($200,000 invest ment limit)

112. Individual Tax Rates, Deductions and Credits
Medical expense deduction
Current Law: Deduct excess over 7.5% AGI
January 1, 2013: Deduct excess over 10% AGI

113. Individual Tax Rates, Deductions and Credits
Student loan interest
Current Law: Phase-out at $60,000 AGI
January 1, 2013: Phase-out at $40,000 AGI

114. Individual Tax Rates, Deductions and Credits
Deduction for tuition and expenses
Current Law: Expired in 2011
January 1, 2013: None

115. Individual Tax Rates, Deductions and Credits
Tax free transfer from IRA to Charity
Current Law: Expired in 2011
January 1, 2013: None

116. Individual Tax Rates, Deductions and Credits
Section 1202 stock
Current Law: 100% exclusion of gain on stock bought 9/27/ /31/2011; % thereafter
January 1, 2013: 50% exclusion

117. Individual Tax Rates, Deductions and Credits
Payroll tax cut
Current Law: SS rate 4.2%
January 1, 2013: SS rate 6.2%

118. Individual Tax Rates, Deductions and Credits
Estate tax rate
Current Law: Max rate 35%
January 1, 2013: Max rate 55%

119. Individual Tax Rates, Deductions and Credits
Estate and gift tax exemption
Current Law: $5,120,000 exemption
January 1, 2013: $1,000,000 exemption

120. Individual Tax Rates, Deductions and Credits
Estate and gift tax portability
Current Law: Surviving spouse can use decedent spouse’s unused exclusion amount
January 1, 2013: No such provision

121. Legislative Top Priorities

122. Extenders Congress will act to guard certain expiring benefits
President Obama has advocated an extension of:
15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

123. Extenders President Obama has advocated an extension of:
Bonus depreciation
R&D credit
Work opportunity tax credit
Treatment of certain dividends of a regulated investment company (RIC)

124. Extenders President Obama has advocated an extension of:
Refined coal credit
Alternative fuel/alternative fuel mixtures credit
Suspension of limitation on percentage depletion for oil and gas from marginal wells
Energy and ethanol credits

125. Summary

126. Top individual tax rate 35% 39.6% Capital gains 15% 20%
Top individual tax rate 35% 39.6%
Capital gains 15% 20%
Dividends 15% Ord. Income
Top estate tax rate 35% 55%
Child tax credit $1,000 $500
AOTC Up to $2,500 Unavailable
Section 179 dollar limit $139,000 $25,000
Bonus depreciation 50% Unavailable
Research tax credit Unavailable Unavailable