Are you trying to figure out how the Patient Protection and Affordable Care Act (“ACA”)1 will impact you and your estate planning clients? While some pundits are estimating that there are 5,000 to 10,000 or more pages of final and proposed regulations regarding the ACA, there are at least a few noteworthy issues for the estate planner to keep in mind when communicating with estate planning clients.
Increase in Medicare Taxes
For our high-income clients, they will need to consider how the ACA will impact their wallets. There are two taxes effective this year that are intended to help pay for the expansion of health coverage and other benefits under the ACA.
• Starting in 2013, the Medicare payroll tax will rise an additional 0.9% to 2.35% on earned income (wages/salaries) exceeding $200,000 ($250,000 for joint filers).2
• There is a 3.8% Medicare unearned income tax on net investment income for individuals with a modified adjusted gross incomes (MAGIs) exceeding $200,000 ($250,000 if filing a joint return or $125,000 if filing a separate return) and the tax is 3.8% of the lesser of excess of MAGI over the highest income tax bracket for an estate/trust or the undistributed net investment income.3 The tax does not apply to non-resident aliens or a trust in which all of the unexpired interests are devoted to charitable purposes under Sec. 170.4 The tax also does not apply to a trust that is exempt from tax under Section 501 or a charitable remainder trust exempt from tax under Section 664.5
• “MAGI” is defined as: adjusted gross income increased by the excess of—
(1) the amount excluded from gross income under section 911(a)(1), over
(2) the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) with respect to the amounts described in paragraph (1).6
• “Unearned income” includes non-business income from dividends, royalties, rents and interest, except municipal-bond interest; short-term and long-term capital gains (e.g., stocks, sales of land, etc…); the taxable portion of annuity payments; income from the sale of a principal home above the $250,000/$500,000 exclusion; a net gain from the sale of a second home; and passive income from real estate and investments in which a taxpayer doesn’t materially participate, such as a partnership.
• Note -- Although the Medicare tax assessed on self-employment income is deductible, the Medicare tax on net investment income is not deductible when computing any tax imposed by subtitle A of the Code (i.e., income taxes).7 The tax is subject to the individual estimated tax provisions.
Options to Reduce/Avoid the New Tax
Unfortunately, with respect to earned income there is little that people can do to avoid these tax increases, except to earn less. However, with respect to investment income, savvy estate planners might consider advising clients, in tandem with their investment advisors, to consider using Roth IRAs which do not give off taxable income, installment sales which spread out taxable income, contributions to charitable remainder trusts which act to defer taxable income or reduce net investment income with tax exempt bonds or consider the viability of using other insurance products to avoid the new tax.
Other Tax Increases
Below is a summary of a few of the other noteworthy tax increases as a result of the ACA.
• A 10% excise tax on indoor UV tanning services has already gone into effect. The tax doesn’t apply to phototherapy services performed by a licensed medical professional on his or her premises. There’s also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.
• A tax, a/k/a an “individual shared responsibility provision” payment to the IRS, on individuals not complying with the ACA mandate, which may range from $0 to $4,500 annually.
• A 2.3% tax will be levied on manufacturers and importers on the sale of certain medical devices. “Medical device” has a broad definition and is believed to include more than 180,000 medical devices. Ask your dental colleagues about this new tax the next time you get your dental crown fixed.
• Effective in 2014 an additional tax will be levied on businesses with 50 or more full-time equivalent (FTE) employees that do not offer minimum essential coverage. This tax will be reconciled on 2014 tax returns in 2015.
• Beginning in 2018, there will be a 40% excise tax indexed for inflation (or the “Cadillac tax”) that will be imposed on employers with insurance plans where the annual premium exceeds $11,500 for an individual, and family plans that exceed $29,450.
Potential Tax Reductions
In addition to the above referenced Medicare and other taxes, there are two potential tax reductions that could affect our tax paying clients irrespective of their income level.
• The threshold for deducting unreimbursed, qualified medical expenses increases from 7.5% of MAGI to 10% of MAGI in 2013 for individuals under age 65. This increase is postponed until 2017 for individuals age 65 and older.
• Flexible Spending Account (FSA) health-care contributions are capped at $2,500 in 2013, with adjustments for inflation in future years. Previously, FSA contributions were subject only to employer plan maximums.
Information Reporting on Health Coverage by Employers
With respect to our business clients, we should keep in mind that the Department of the Treasury and IRS issued proposed regulations8 on employer health insurance coverage information reporting. The information reporting relates to health insurance coverage that is offered by certain employers, referred to as applicable large employers, and reporting is to be provided by each applicable large employer member. Additionally, the Department of the Treasury and the IRS announced transition relief for 2014 from this annual information reporting. Notwithstanding this transition relief, once the information reporting rules have been issued, employers and other reporting entities are encouraged to voluntarily comply with the information reporting provisions for 2014. For more information, please see IRS Notice 2013-45.
Small Business Health Care Tax Credit
In addition to the new information reporting requirements, the Small Business Health Care Tax Credit (“credit”) helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low-income and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. Small businesses and tax-exempt organization that employ 25 or fewer workers with average incomes of $50,000 or less, and that pay at least half of the premiums for employee health insurance coverage are eligible for the credit. For tax year 2013, the maximum credit is 35% for small business employers and 25% for small tax-exempt employers such as charities. In general, on Jan. 1, 2014, the rate will increase to 50% and 35%, respectively. For more information see the IRS we site section on Small Business Health Care Tax Credit for Small Employers.
Exemptions from ACA
If a client is looking for a legitimate way around making the ACA payment, then keep in mind that the following categories are exempted from making the ACA payment.9
• Religious conscientious objection.
• Healthcare sharing ministry.
• Member of an Indian tribe.
• No federal tax filing requirement.
• Short coverage gap for three months.
• Unaffordable coverage – if it costs more than 9 ½ % of MAGI.
• Incarcerated in a penal institution.
• Not a U.S. citizen or not in the USA.
Non-Tax Impact on Seasoned Persons
Our seasoned clients will likely be impacted by the ACA in the following non-tax ways.
• They will continue to receive prescription drug savings through brand name and generic discounts.
• The Part D prescription drug coverage gap known as the “donut hole” will be phased out.
• Covered annual wellness visits for beneficiaries will continue to be provided by Medicare.
Whether you are for or against implementation of the ACA, the ACA is here to stay and attorneys must be informed regarding how the ACA will impact our clients. Antagonists might argue that one of the ACA’s unintended consequences may be the coming shortage of doctors; combine this with a Medicare program that pays less and less and the prospect for adequate senior medical care could be in trouble. Proponents, on the other hand, will maintain that the ACA will provide greater access to health care coverage, improve the quality of services delivered and reduce the rate of increase in health spending. Ultimately, one thing is certain, someone will pay for the ACA implementation and there’s a good chance that many of our clients are in that camp. ■