By Ryan Ellis
Nearly all Obamacare taxes repealed.The bill repeals all Obamacare taxes starting in 2018. The biggest ones here are the 3.8 percentage point Medicare payroll tax bracket, the 3.8 percent surtax on savers, the “high medical bills tax,” the “medicine cabinet tax,” a flurry of tax increases on health savings accounts (HSAs) and flexible spending accounts (FSAs), the medical device tax, and a series of tax hikes on various health industries. One missing tax repeal is the economic substance doctrine, but that may have to do with the “Byrd rule” limitation on reconciliation bills.
Individual mandate and employer mandate retroactively repealed. These two Obamacare taxes have been zeroed out and retroactively applied to 2016 onward. If necessary, families and businesses will be able to file amended returns to get their penalty taxes back.
“Cadillac plan” tax deferred until 2025. The most significant Obamacare tax not repealed is the 40 percent excise tax on high cost, employer provided health insurance plans (“Cadillac plans”). The tax on these plans was already delayed by the permanent extenders bill, and is delayed further here. Earlier drafts featured a repeal of this tax, replaced by a cap on the employee tax exclusion on the most expensive employer provided plans. It is disappointing that this did not make the final cut, as it’s far superior policy to the Cadillac plan tax. It is good, however, that the employer community which so vociferously objected to the new cap still must live under the specter of the far-worse Cadillac plan tax.
New tax credit to purchase health insurance. Starting in 2020, those not offered health insurance at work (this will have to be certified) or eligible for government health insurance (Medicare or Medicaid) will have the ability to use a new advanceable/refundable healthcare tax credit. It’s only available to citizens and green card residents, and is not available to prisoners.
The credit is age adjusted. You simply add up the people in your household to determine the credit size:
- Children and those under age 30 get $2000
- 30 to 39 year olds get $2500
- 40 to 49 year olds get $3000
- 50 to 59 year olds get $3500
- 60 year olds to Medicare age get $4000
Those figures are indexed to inflation plus one percentage point. The maximum credit amount is $14,000. Only the oldest five people in a family count toward the calculation.
As an example, a family of four with two adults in their 40s and two kids would get a credit of $10,000 ($3000 for each adult and $2000 for each child).
This credit is “advanced” every month by their insurance company toward their premium. If our family above wanted a plan with premiums of $12,000 per year/$1000 per month, they would only have to pay $2000 out of pocket/$167 per month (the credit reduces the premium dollar for dollar up front, every month).
If our family wanted a less expensive health insurance plan that cost $9000, their $10,000 credit would be enough to pay for the whole thing. The remaining $1000 could be deposited into the family HSA (without lowering the maximum HSA contribution limit).
There’s a means test on the credit to target it to middle class and working class families. Married couples making at least $150,000 per year would lose $100 of tax credit for every $1000 their income exceeds $150,000. For all other taxpayers, the income phaseout starts at $75,000. Self employed taxpayers will still be able to deduct their health insurance premiums above the line.
The credit is available even if income tax liability is zeroed out–the family still gets the money. This is what is meant by a “refundable” tax credit.
If a taxpayer didn’t claim enough credit, they would get the difference when they went to file their taxes the next spring. If they claimed too much tax credit, they would have to pay it back on their tax return.
In the leadup to the new tax credit, the more restrictive and stingy Obamacare tax credit will remain available with far fewer strings on it.
HSAs Greatly Expanded. The House bill greatly expands HSAs starting in 2018 in three ways. First, the contribution limit is nearly doubled from about $6500 today for a family to about $13,000 (these figures halved for singles). That means that HSAs will become a powerful new financial savings vehicle to rival 401(k)s and IRAs.
Second, the bill allows spouses to make over age 50 “catch up” contributions to the same HSA. Finally, the bill allows HSAs to pay for certain medical expenses incurred before the HSA was established.
My take is that this is a very powerful combination of pro-growth and conservative tax policy. When you combine a capital gains tax cut with turbo charged HSAs and an individual tax credit, you have a good package on your hands. The big disappointment is that we couldn’t get a limit on employer provided coverage, but politics is the art of the possible. What’s left is very good and should be supported by conservatives.
Read more here.