Last week, on March 6th, the House Republicans unveiled their draft legislation that would repeal and replace the Affordable Care Act (ACA). This plan would ultimately continue the ACA’s premium tax credit through 2019 and then replace it in 2020. Then, a new credit for individuals without government insurance and those who are not offered insurance by their employer will be available.
Additional details are provided below. Dagley & Co. wants you to keep in mind that the legislation is only a draft legislation and is subject to changes.
Repeal of the Individual Mandate
Background: Under the ACA, individuals are generally required to have ACA-compliant health insurance or face a “shared responsibility payment” (penalty for not being insured). For 2016, the annual penalty was $695 per uninsured individual ($347.50 per child), with a maximum penalty of $2,085 per family.
GOP Legislation: Under the new legislation, this penalty would be repealed after 2015.
Repeal of the Employer Mandate
Background: Under the ACA, large employers, generally those with 50 or more equivalent full-time employees, were subject to penalties that could reach thousands of dollars per employee for not offering their full-time employees affordable health insurance. These employers were also subject to some very complicated reporting requirements.
GOP Legislation: Under the new legislation, this penalty would be repealed after 2015.
Recapture and Repeal of the Premium Tax Credit
Background: The premium tax credit (PTC) is a health insurance subsidy for lower-income individuals, and it is based on their household income for the year. Since the household income can only be estimated at the beginning of the year, the insurance subsidy, known as the advance premium tax credit (APTC), must also be estimated at the beginning of the year. Then, when the tax return for the year is prepared, the difference between the estimated amount of the subsidy (APTC) and the actual subsidy allowed (PTC) is determined based on the actual household income for the year. If the subsidy paid was less than what the individual was entitled to, the excess is credited to the individual’s tax return. If the subsidy paid was more than what the individual was entitled to, the difference is repaid on the tax return. However, for lower-income taxpayers there is a cap on the amount that needs to repaid, and this is also based on household income.
GOP Legislation: For tax years 2018 and 2019, the GOP legislation would require the repayment of the entire difference regardless of income. In addition, the PTC would be repealed after 2019.
Background: The current law does not allow the PTC to be used for the purchase of catastrophic health insurance.
GOP Legislation: The new legislation would allow premium tax credits to be used for the purchase of qualified “catastrophic-only” health plans and certain qualified plans not offered through an Exchange.
Refundable Tax Credit for Health Insurance
Beginning in 2020, as a replacement for the current ACA insurance subsidies (PTC), the GOP Legislation would create a universal refundable tax credit for the purchase of state-approved major medical health insurance and un-subsidized COBRA coverage. Generally eligible individuals are those who do not have access to government health insurance programs or an offer of insurance from any employer.
The credit is determined monthly and ranges from $2,000 for those under age 30 to $4,000 for those over 60. The credit is additive for a family and capped at $14,000. The credit phases out for individuals who make more than $75,000 and for couples who file jointly and make more than $150,000.
Health Savings Accounts
Background: Individuals covered by high-deductible health plans can generally make tax-deductible contributions to a health savings account (HSA). Currently (2017), the maximum that can be contributed is $3,400 for self-only coverage and $6,750 for family coverage. Distributions from an HSA to pay qualified medical expenses are tax-free. However, non-qualified distributions are taxable and generally subject to a 20% penalty.
GOP Legislation: Beginning in 2018, the HSA contribution limit would be increased to at least $6,550 for those with self-only coverage and to $13,100 for those with family coverage. In addition, the new legislation would do the following:
- Allow both spouses to make catch-up contributions (applies to those age 55 through 64) beginning in 2018.
- Allow medical expenses to be reimbursed if they were incurred 60 days prior to the establishment of the HSA (whereas currently only expenses incurred after the HSA is established qualify).
- Lower the penalty for non-qualified distributions from the current 20% to 10% (the amount of the penalty prior to 2011).
Medical Deduction Income Limitation
Background: As part of the ACA, the income threshold for itemizing and deducting medical expenses was increased from 7.5% to 10% of the taxpayer’s AGI.
GOP Legislation: Under the new legislation, the threshold would be returned to 7.5% beginning in 2018 (2017 for taxpayers age 65 or older).
Repeal of Net Investment Income Tax
Background: The ACA imposed a 3.8% surtax on net investment income for higher-income taxpayers, generally single individuals with incomes above $200,000 and $250,000 for married taxpayers filing jointly.
GOP Legislation: The new legislation would repeal this tax after 2017.
Repeal on FSA Contribution Limits
Background: Flexible spending accounts (FSAs) generally allow employees to designate pre-tax funds that can be deposited in the employer’s FSA, which the employee can then use to pay for medical and other qualified expenses. Effective beginning in 2013, annual contributions to health FSAs (also referred to as cafeteria plans) were limited to an inflation-adjusted $2,500. For 2017, the inflation limitation is $2,550.
GOP Legislation: The new legislation would remove the health FSA contribution limit, effective starting in 2017.
Repeal of Increased Medicare Tax
Background: Beginning in 2013, the ACA imposed an additional Medicare Hospital Insurance (HI) surtax of 0.9% on individuals with wage or self-employed income in excess of $200,000 or $250,000 for married couples filing jointly.
GOP Legislation: The new legislation would repeal this surtax beginning in 2018.
- Preexisting Conditions – Prohibits health insurers from denying coverage or charging more for preexisting conditions. However, to discourage people from waiting to buy health insurance until they are sick, individuals will need to maintain “continuous” coverage. Those who go uninsured for longer than a set period will be subject to 30% higher premiums as a penalty.
- Children Under Age 26 – Allows children under age 26 to remain on their parents’ health plan until they are 26.
- Small Business Health Insurance Tax Credit – Repealed after 2019
- Medical Device Tax – Repealed after 2017
- Tanning Tax – Repealed after 2018
- Over-the-Counter Medication Tax – Repealed after 2017
This is a proposed law change, and it may not ultimately turn out as described here. If you have any questions, please give Dagley & Co. a call.
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Divorced or separated parent with a child/children? Commonly encountered but an often-misunderstood issue is who claims the child or children for tax purposes. This is sometimes a hotly disputed issue between parents; however, tax law includes some very specific but complicated rules about who profits from the child-related tax benefits. At issue are a number of benefits, including the children’s dependency tax exemption, child tax credit, child care credit, higher-education tuition credit, earned income tax credit, and in some cases even filing status.
This is actually one of the most complicated areas of tax law, and serious mistakes can be made by taxpayers preparing their own returns or inexperienced tax preparers, especially if the parents are not communicating well. Where parents will cooperate with each other, they often can work out the best tax result overall, even though it may not be the best for them individually, and compensate for it in other ways.
Where a family court awards physical custody of a child to one of the parents, tax law is very specific in awarding that child’s dependency to the parent with physical custody, regardless of the amount of child support provided by the other parent. However, the custodial parent may release the dependency (exemption) to the non-custodial parent by completing the appropriate IRS form.
On the other hand, if the family court awards joint physical custody, only one of the parents may claim the child as a dependent for tax purposes. If the parents cannot agree between themselves as to who will claim the child and the child is actually claimed by both, the IRS tiebreaker rules will apply. Per the tiebreaker rules, the child is treated as a dependent of the parent with whom the child resided for the greater number of nights during the tax year, or if the child resides with both parents for the same amount of time during the tax year, the parent with the higher adjusted gross income claims the child as a dependent.
Child’s Exemption – The parent who claims the child as a dependent is entitled to the child’s tax exemption – which is actually a deduction from income of $4,050 in 2016. However, the exemption begins to phase out for higher-income taxpayers with an AGI of $259,400 for single taxpayers, $285,350 for those qualifying for head of household filing status and $311,300 for married taxpayers filing jointly.
Head of Household Filing Status – An unmarried parent can claim the more favorable head of household, rather than single, filing status if the parent is the custodial parent and pays more than one-half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one-half the year for that child. This is true even when the child’s dependency (and therefore the $4,050 exemption deduction) is released to the non-custodial parent.
Tuition Credit – If the child qualifies for either the American Opportunity or the Lifetime Learning higher-education tax credit, the credit goes to whoever claims the child’s exemption. Credits are significant tax benefits because they reduce the amount of tax dollar-for-dollar, while deductions reduce income to arrive at taxable income that is then taxed according to the individual’s tax bracket. For instance, the American Opportunity Tax Credit (AOTC) provides a tax credit of up to $2,500, 40% of which is refundable. However, both education credits phase out for higher-income taxpayers. For instance, the AOTC phases out between $65,000 and $80,000 for unmarried taxpayers and $130,000 and $160,000 for married taxpayers.
Child Care Credit – A nonrefundable tax credit is available to the custodial parent for the care of the child while the parent is gainfully employed or seeking employment. To qualify for this credit, the child must be under the age of 13 and be a dependent of the parent. However, a special rule for divorced or separated parents provides that where the custodial parent releases the child’s exemption to the non-custodial parent, the custodial parent would still qualify to claim the childcare credit, and it cannot be claimed by the noncustodial parent.
Child Tax Credit – A credit of $1,000 is allowed for a child under the age of 17. That credit goes to the parent claiming the child as a dependent. However, this credit phases out for higher-income parents, beginning at $75,000 for unmarried parents and $110,000 for married parents filing jointly.
Affordable Care Act – Parents must keep in mind that where the child does not have medical insurance during periods of the year, the parent claiming the child as a dependent (claims the $4,050 exemption) is the one responsible for any applicable penalties when the child does not have health insurance coverage.
Earned Income Tax Credit (EITC) – Lower-income parents with earned income (wages or self-employment income) may qualify for the EITC. This credit is based on the number of children (under age 19 or a full-time student under age 24) the custodial parent has, up to a maximum of three children. Releasing the dependency exemption to the noncustodial parent will not disqualify the custodial parent from using the children to qualify for the EITC. In fact, the noncustodial parent is prohibited from claiming the EITC based on the child or children whose exemption has been released by the custodial parent.
As you can see, there are some complex rules that apply to the tax benefits provided by children of divorced parents. It is highly recommended that you consult with Dagley & Co. for the preparation of your return. If you are the custodial parent you should also consult with this office before making the decision to release a child’s exemption.
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In recognition of the five-year anniversary of healthcare reform, we have put together a list of five things you should know about some of the key ACA requirements for businesses in 2015. It has been five years since the Patient Protection and Affordable Care Act (the ACA) was signed into law. Healthcare reform has certainly been controversial, but this controversy does not absolve some businesses of certain responsibilities when it comes to offering minimum essential healthcare coverage to their employees.
- The shared responsibility provision of healthcare reform is effective either this year or next year, depending on how many employees you have. Also known as the employer mandate or “play or pay,” this provision requires companies with at least 50 full-time equivalent employees to offer minimum essential healthcare coverage to their full-time employees and their dependents. Or, such businesses — which are referred to by the law as applicable large employers (ALEs) — can pay a substantial non-deductible penalty if they prefer.
Companies with 100 or more full-time employees (or full-time equivalents) must begin complying with the shared responsibility provision this year. Specifically, they must offer qualifying healthcare coverage to 70 percent or more of their full-time employees and their dependents this year and 95 percent of them in 2016. Meanwhile, companies with between 50 and 99 full-time employees or equivalents must begin complying with the shared responsibility provision next year.
- Depending on the size of your business, you might not be subject to the shared responsibility provision at all. There’s good news in the ACA for many small businesses. Companies with fewer than 50 full-time employees or equivalents are not subject to the shared responsibility this year or next year. However, if these businesses want to offer healthcare coverage to their employees, they can buy coverage on the Small Business Health Options Marketplace, or SHOP. This marketplace could lower small firms’ health insurance costs by giving them more buying power.
- The healthcare coverage your business provides employees under the ACA must meet certain criteria. Specifically, this coverage must be affordable and it must provide minimum value. Healthcare reform considers coverage to be “affordable” if employees’ share of their premiums doesn’t exceed 9.56 percent of their annual household income in 2015. And it considers “minimum value” to be a policy that covers at least 60 percent of the cost of healthcare services.
- Your business might qualify for a tax credit for contributions you make toward employees’ premiums. Small businesses with up to 25 full-time equivalent employees could receive a tax credit of up to 50 percent toward their contributions to employees’ healthcare premiums. To qualify, your business must pay at least half of the premiums and employees’ average annual wages in 2015 cannot be more than $51,600 (adjusted each year for inflation going forward). Also, this tax credit will be reduced if you had more than 10 full-time equivalent employees last year and/or employees’ average annual wages last year were more than $25,400 (also adjusted each year for inflation going forward).
- The ACA includes requirements to report coverage information to the IRS. ALEs are required to certify that they offered full-time employees and their dependents the opportunity to enroll in minimum essential healthcare coverage by filing Form 1094-C with the IRS. In addition, they must also issue a Form 1095-C employee statement to each full-time employee. These information-reporting requirements were voluntary this year for coverage provided in 2014, but they will be required next year for coverage provided in 2015.
Be sure to contact Dagley & Co. with any questions about your company’s specific responsibilities under the ACA this year. You’ll find our contact information at the bottom of this page.
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