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How Will the Health Care Legislation Affect You and Your Taxes?

In late March 2010, President Obama signed into law the new health care legislation. The legislation will affect virtually every individual in one way or another and will significantly impact the preparation of tax returns in the future. The provisions take effect over a period of years and are categorized by the year they become effective. Some of the provisions include additional taxes to offset the cost of the health care benefits included in the legislation for lower-income individuals.

The following is an overview of the provisions that apply to individual taxpayers and small businesses.

2009
o Student Loan Forgiveness for Health Professionals – Excludes student loan debt forgiveness from income for certain medical professionals who work in health professional shortage areas.

o Investment Credit for Therapeutic Discovery Projects – A small company investment tax credit for expenses incurred for qualified investments in qualifying therapeutic discovery projects.

2010
o Insurance for Uninsured Americans with Pre-Existing Conditions – A Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition.

o Expanding Coverage for Early Retirees – A program that provides reimbursement to sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents.

o Providing Free Preventive Care – New plans must cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance.

o Pre-Existing Condition Exclusions for Children Under Age 19 – For new plans and existing group plans, the new law includes rules to prevent insurance companies from denying coverage to children under the age of 19 due to a pre-existing condition.

o Elimination of Arbitrary Rescission of Coverage – Insurance companies may no longer retroactively cancel policies because of an "unintentional" mistake on paperwork.

o Lifetime Limits are Phased Out – Effective for all policies issued after September 23, 2010 and those renewing after this date, there can no longer be lifetime limits placed on health care plans.

o Annual Dollar Limits – There is a phase out of annual dollar expenditure limits on health plans over the next three years until 2014 when the Affordable Care Act bans them for most plans.

o Tanning Services Excise Tax – A new 10% excise tax is imposed on the amount paid for any indoor tanning service.

o Excludable Medical Reimbursements for Older Children – An income exclusion for reimbursements of medical care expenses by an employer-provided accident or health plan is extended to any child of an employee who hasn't attained age 27.

o Self-Employed Health Insurance Deduction – Self-employed individuals may include in their tax-deductible health insurance children who have not attained age 27.

o Tax Credits for Small Employers Offering Health Coverage – Provides a tax credit for an eligible small employer for non-elective contributions to purchase health insurance for its employees.

2011
o Employer W-2 Reporting Responsibilities – Employers will be required to disclose the aggregate cost of employer-sponsored health coverage to their employees on Form W-2.

o Increased Tax on Nonqualifying HSA or Archer MSA Distributions – The additional tax for making non-medical withdrawals from Health Savings Plans and Archer MSA plans is increased to 20%.

o Over-the-Counter Medication Restriction for Employer Plans – Over-the-counter medications will no longer qualify for reimbursement.

o Small Employer Simple Cafeteria Plans – Small employers may provide employees with a "simple cafeteria plan."

2012
O Information Reporting Required for Payments to Corporations – Businesses that pay any amount greater than $600 during the year to non-tax-exempt corporate providers of property and services will have to file an information report with each provider and with IRS.

2013
o Additional Hospital Insurance Tax for High-Income Taxpayers – The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on incomes over a threshold.

o Surtax on Unearned Income for High-Income Taxpayers – A 3.8% surtax is imposed on net investment income of high-income individuals, estates, and trusts.

o Employer Health FLEX-Spending Plan Contributions Limited – Medical reimbursements from flexible spending plans is limited to $2,500.

o Medical Itemized Deductions Limited – The AGI threshold percentage for claiming itemized medical expenses is increased from 7.5% to 10%.

o Compensation Deduction Limit for Health Insurance Issuers – Limits companies' deduction for certain employees' compensation.

2014
o Mandatory Heath Insurance Overview – Many of the provisions of the Health Care Legislation are linked to the mandate that everyone becomes insured. The chart provides an overview of how these provisions interact to achieve that goal.

o American Health Benefit Exchanges – By 2014, each state must establish an exchange to help individuals and small employers obtain coverage.

o Penalty For Not Being Insured – Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage.

o Premium Assistance Credit – Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”.

o Free Choice Vouchers – Employers who offer minimum essential coverage through an eligible employer-sponsored plan and are paying a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage through the insurance exchange.

o Large Employer Health Coverage Excise Tax – Large employers would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy.

2018
o Excise Tax on High-Cost Employer-Sponsored Health Coverage – There will be a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed certain limits.

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Student Loan Forgiveness for Health Professionals: Previously, an individual’s gross income didn’t include cancellation of debt income that was attributable to the discharge of all or part of any student loan if the discharge was made under a provision of the loan - that all or part of the indebtedness would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.
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Investment Credit for Therapeutic Discovery Projects: In 2009 and 2010, for companies with 250 or fewer employees, a 50% nonrefundable investment tax credit is allowed for expenses paid or incurred for qualified investments in qualifying therapeutic discovery projects.
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Insurance for Uninsured Americans with Pre-existing Conditions: Beginning July 1, 2010, a Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition.
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