Taxable Talk

As most of you know, a second federal court judge has ruled the Health Care Law that passed last year is unconstitutional. Judge Rodger Vinson didn’t just rule that the mandate that health insurance must be bought is stricken; rather, he struck down the entire law. While the Obama Administration is publicly stating the law will continue to be enforced (and, in theory, either Judge Vinson or the 11th Circuit Court of Appeals could issue a stay to Judge Vinson’s ruling), as of now the law is void.

What next for the tanning tax? Or the numerous other tax provisions in the legislation that impact individuals? How about the business tax provisions?

I’m not an attorney, but the Volokh Conspiracy has some good posts up on this, though they aren’t really looking at the tax consequences (but do look at the constitutional issues in depth). As I was writing this, I noticed that Joe Kristan was asking the same questions.

My best guess is that the 11th Circuit will stay the decision until they review it. And it sure looks like this case is bound for the Supreme Court (perhaps in 2012 or 2013).

So if you’re a tanning salon should you stop collecting the 10% excise tax on tanning? I’ll probably have an answer in a couple of weeks but that answer could easily change between now and 2013.

The new healthcare legislation contains plenty of taxes. One especially bad one is a new 3.8% tax on unearned income above $200,000. This will have a very bad impact on amateur gamblers.

When I last looked at the bill, the tax was 2.9%. In the “final” version of the bill, it’s up to 3.8%. Let’s take a hypothetical gambler, Joe Student. Mr. Student has $500,000 of winning sessions and $495,000 of losing sessions. After his standard deduction and exemption he owes no tax.

But not in the near future. He’ll owe 3.8% on $300,000 of mostly phantom income, or $11,400. What will Joe Student do? He’ll cheat on his taxes, of course. Pay $6,400 more than what he made on his income—you must be kidding! But that’s exactly what the legislation dictates.

This legislation is bad in many ways, but from a tax standpoint it’s a disaster. Unfortunately, I don’t have the time right now to read the bill and find out what other nuggets are in the legislation; I’m forced to rely on others such as Keith Hennessey. Luckily, Mr. Hennessey and others do have the time to review legislation that remains unpopular, unworkable, and insane.

When I last wrote about the healthcare legislation, I noted the 17 taxes which would be in the plan. Let’s see what’s new in the “Unified Health Care Legislation” proposed by President Obama.

1. Individual Mandate Tax. For those who don’t purchase health insurance, this income tax surcharge continues to exist in this plan. I couldn’t determine the exact rate.

2. Employer Mandate Tax. On businesses with 50+ employees that do not offer health care, and at least one employee qualifies for a tax credit, $750/employee. This will cause many small businesses to stop growing once they reach 49 employees. Those figures come from the prior version. News reports indicate that this tax is still in the proposal.

It is unclear if a waiting period tax remains in the legislation.

3. Excise Tax on Health Insurance Plans. Beginning in 2013 2018, 40% tax (the percentage may be wrong) on plans costing $8500/$23,000 $10,200/$27,500. Is indexed to CPI. It is unclear whether exemptions in the Senate version have been continued in this proposal.

4. Health Insurance would be reported on W-2s. Another mandate that increases costs for business. It’s unclear whether this mandate survived. However, the White House release states that loopholes will be closed which implies this remains.

5. “Medicine Cabinet Tax.” Limitation on HSAs, FSAs, and MSAs to purchase non-prescription medication except insulin. Note that this is also in the House healthcare bill. This is definitely in the new proposal.

6. HSA Withdrawal Tax Increased. The tax would increase to 20% from 10%. This is also in the House legislation. This is definitely in the proposal.

7. FSAs capped at a maximum of $2500. They are now uncapped. This is definitely in the proposal.

8. 1099 Reporting for corporations. Requires businesses to send 1099-MISCs to corporations. This is another cost for businesses. This will begin in 2011 and will definitely increase my income. This is definitely in the proposal, but it’s unclear if this starts in 2011.

9. Tax on Charitable Hospitals. This excise tax of $50,000 per hospital impacts hospitals that don’t meet new Department of Health and Human Services regulations. It’s unclear whether this is in the proposal.

10. Tax on Drug Companies. The tax would be $2.3 billion based on sales percentage. There’s definitely a tax on drug companies, but the size and timing of the tax is unclear.

11. Tax on Medical Device Manufacturers. The $2 billion tax is also based on sales percentage. It rises to $3 billion in 2017. This tax is in the bill, but the size and timing of the tax is not clear.

12. Tax on Health Insurers. A $6.7 $10 billion tax based on percentage of health insurance premiums collected. It now phases in gradually until 2017. This tax is definitely in the bill, but the size and timing of the tax is unclear.

13. Elimination of tax deduction for employer provided retirement prescription drug coverage. It is unclear whether this tax is in the measure.

14. Increase of percentage of AGI required to deduct medical expenses from 7.5% to 10%. Few can deduct medical expenses today; fewer will be able to deduct them tomorrow. It is unclear whether this tax is in the proposal.

15. Compensation Limitation for Health Insurance Executives. If you work in that industry, you will be limited to a salary of $500,000. There’s no mention of this in the measure. However, given the Obama Administration’s stance on various pay-related measures, it’s likely included.

16. Medicare Payroll Tax Hikes. Once your income exceeds $200,000/$250,000 (MFJ), you will pay an additional 0.9% tax. Note that the employer will only collect (and be responsible for this tax) if you earn $200,000/$250,000 or more. This also impacts the self-employed. And the law is written so that the self-employed cannot deduct half of the new tax as a deduction to income tax. It appears this provision is dead. However, it’s been replaced with something worse (see below).

16. New Hospital Insurance Tax. “The Act will include an additional 0.9 percentage point Hospital Insurance tax for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly.” I remember then-candidate Obama stating that if you made under $250,000, he wouldn’t increase your taxes. Yeah, right.

17. New Unearned Income Tax. “[The Act] would add a 2.9 percent tax for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly to unearned income including interest, dividends, annuities, royalties and rents (excluding income from active participation in S corporations).” This is yet another measure which will stifle the economy in the United States. For my amateur gambling clients, this is particularly bad—it means your taxes will go up based on your gambling winnings, not your gambling net income.

18. Blue Cross Tax. There is a tax deduction available today for Blue Cross and Blue Shield companies; this tax deduction will vanish if they don’t spend 85% (or more) of premiums on clinical services. There’s no mention of this in the proposal. However, it was in both the House and Senate Democratic proposals and I expect it’s in this one, too.

19. Excise Tax on Cosmetic Medical Procedures. A new 5% excise tax on these procedures. This one is dead.

19. Tax on Indoor Tanning. A new 10% excise tax on indoor tanning salons. This one made the cut.

20. Paper Production and Cellulosic Biofuels. “[Close] the loophole that allows certain byproducts of paper production to be eligible for the cellulosic biofuels producer credit.” This new tax provision is in the measure.

21. Strengthen Economic Substance Rules. “[Help] prevent tax shelters by clarifying the definition of when activities have true “economic substance” beyond evading taxes.” While the details aren’t listed, it’s clear that this provision will strengthen the economic substance rules. This will increase costs for complex transactions, and will likely depress economic activity.

Obviously, the devil is in the details and all that’s been released is a framework. Unfortunately, the framework looks rotten to the core. The Congressional Budget Office can’t determine what the cost of the measure is. And until the actual legislation appears, line by line, who knows what’s in it. The House bill was a model of brevity at just under 2,000 pages. The Senate bill was just a wee bit longer, at around 2,800 pages. I suppose this measure (when we see it) will be about 3,500 pages. What appears certain is that there are more taxes in this measure.

The public doesn’t want this. They believe (rightly) it will add yet more bureaucracy to Washington, and that it reeks of socialized medicine. So who cares about the cost (estimated at just under $1 Trillion by the White House), public opinion, or that it will devastate the economy.

There was an election in Massachusetts on Tuesday. As I’m sure you’re aware, Republican Scott Brown is the new Republican Senator from Massachusetts. Apparently, Democrats in Sacramento are blind to the obvious.

The voters in Massachusetts, a state more liberal than California, had enough of tax and spend, and the Democrats’ health care plan. They wanted fiscal responsibility. So what happened in Sacramento today?

SB810, a $220 billion healthcare plan, passed on a party-line vote today in Sacramento. The bill would create a one-payer system, is far more intrusive than any of the proposals in Washington, and is one that would officially bankrupt California. The good news is that it is extraordinarily unlikely that Governor Schwarzenegger would sign the measure.

Still, why this measure even saw the light of day says a lot about the dysfunction in Sacramento and why I expect more smoke and mirrors to be the “solution” to the budget crisis in the state capital.

Many of you may remember the movie classic Network:

On Tuesday, voters in Massachusetts sent a message to politicians. Massachusetts elected a Republican Senator. To put that in perspective, the last time a Republican was elected to the Senate in Massachusetts was in 1976, nearly forty years ago.

Massachusetts elects Democrats the same as the Sun rises in the eastern sky every day. But that didn’t happen on Tuesday. The why of that has to both directly and indirectly with taxes.

Massachusetts has been known informally for years as “Taxachusetts.” Actually, the Commonwealth is no longer among the “leaders” in high taxes in the U.S. It’s not that Massachusetts has gotten better; rather, other states, California included, have gotten worse. Still, Massachusetts recently had an initiative to eliminate its income tax (it failed). The current governor, Democrat Deval Patrick, has proposed tax increases. The voters in Massachusetts haven’t shown much love for that idea.

With the Massachusetts legislature and the governship in the hands of Democrats, wouldn’t voters in liberal Massachusetts be happy? Not hardly. Now add in Congress–completely in the hands of Democrats–and a Democratic President. During the past year, they have spent like there’s no tomorrow. Massachusetts residents may be liberal, but they’re not dumb. Sooner or later the bill for that spending must come due.

The last straw was the current health care “reform” measure. It doesn’t take a genius to see the money being wasted in this legislation. To get enough votes so that it would pass the Senate, giveaways (measured in billions of dollars) were done for Louisiana, Nebraska, and Connecticut; there are probably many, many more that no one knows about. After all, the legislation runs over 2,700 pages. I, and other bloggers, have noted, “It’s unpopular, unworkable, and insane, so naturally they’re in a hurry to pass it.”

Voters in Massachusetts and elsewhere want a small, nimble government. What they see coming out of Washington and the local state house is bloated bureaucracy. If you are a politician running for office this year a message has been sent. Imagine you’re going through a tunnel, and you see a light getting brighter and brighter. For those politicians who will embrace what voters want, the tunnel is at an end. I believe that for many politicians the light is an oncoming train.

So I noted last month (more accurately, noting that Joe Kristan’s comment was completely accurate). We have a new listing of the taxes in the healthcare legislation. The new taxes are noted by italics while taxes that have been removed are noted by strikeout text.

1. Individual Mandate Tax. For those who don’t purchase health insurance, this income tax surcharge will start at $95 $495 (S)/$295 $990 (2)/$1485 (3+) or 0.5% of AGI in 2014 and rise in 2016 and future years to $750 $495/$2250 $990/$1485 or 2% of AGI.

2. Employer Mandate Tax. On businesses with 50+ employees that do not offer health care, and at least one employee qualifies for a tax credit, $750/employee. This will cause many small businesses to stop growing once they reach 49 employees.

There is also a waiting period tax of $400 (if the wait is 30-60 days) or $600 (60+ days). This tax also starts in 2014.

3. Excise Tax on Health Insurance Plans. Beginning in 2013, 40% tax on plans costing $8500/$23,000. Is indexed to CPI. In high premium states such as California, many plans would pay this tax. My health insurance would likely pay this tax…and it’s not a Cadillac plan. There’s a higher threshold for early retirees ($9850/$26,000) and those in “high-risk” professions. Longshoremen are exempt.

4. Health Insurance would be reported on W-2s. Another mandate that increases costs for business.

5. “Medicine Cabinet Tax.” Limitation on HSAs, FSAs, and MSAs to purchase non-prescription medication except insulin. Note that this is also in the House healthcare bill.

6. HSA Withdrawal Tax Increased. The tax would increase to 20% from 10%. This is also in the House legislation.

7. FSAs capped at a maximum of $2500. They are now uncapped.

8. 1099 Reporting for corporations. Requires businesses to send 1099-MISCs to corporations. This is another cost for businesses. This will begin in 2011 and will definitely increase my income.

9. Tax on Charitable Hospitals. This excise tax of $50,000 per hospital impacts hospitals that don’t meet new Department of Health and Human Services regulations.

10. Tax on Drug Companies. The tax would be $2.3 billion based on sales percentage.

11. Tax on Medical Device Manufacturers. The $2 billion tax is also based on sales percentage. It rises to $3 billion in 2017.

12. Tax on Health Insurers. A $6.7 $10 billion tax based on percentage of health insurance premiums collected. It now phases in gradually until 2017.

13. Elimination of tax deduction for employer provided retirement prescription drug coverage.

14. Increase of percentage of AGI required to deduct medical expenses from 7.5% to 10%. Few can deduct medical expenses today; fewer will be able to deduct them tomorrow.

15. Compensation Limitation for Health Insurance Executives. If you work in that industry, you will be limited to a salary of $500,000.

16. Medicare Payroll Tax Hikes. Once your income exceeds $200,000/$250,000 (MFJ), you will pay an additional 0.5% 0.9% tax. Note that the employer will only collect (and be responsible for this tax) if you earn $200,000/$250,000 or more. This also impacts the self-employed. And the law is written so that the self-employed cannot deduct half of the new tax as a deduction to income tax.

17. Blue Cross Tax. There is a tax deduction available today for Blue Cross and Blue Shield companies; this tax deduction will vanish if they don’t spend 85% (or more) of premiums on clinical services.

18. Excise Tax on Cosmetic Medical Procedures. A new 5% excise tax on these procedures.

18. Tax on Indoor Tanning. A new 10% excise tax on indoor tanning salons.

This is bad legislation, unwieldy, probably unconstitutional, and will hurt us all. So of course there’s a rush to pass it….

There is no free lunch. If the government provides us a benefit, it’s really we who provide that benefit. It’s our government, and the money that it’s giving us is our own, whether that money is borrowed or comes from tax receipts.

The health care legislation that appears likely to pass the Senate is such a bill. The legislation, which runs at least 2000 pages, contains numerous tax components. The latest change eliminates a tax on cosmetic surgery but adds a tax on indoor tanning. Medicare taxes will be increased on individuals earning more than $200,000 by 0.9%. Those are just two of the taxes in this legislation.

And there are numerous carve-outs and special deals so that the bill could make its way through the Senate. Nebraska won’t have to pay for Medicare; the other states will under this legislation. That deal was so that Ben Nelson, a Democrat who represents a relatively conservative state (Nebraska), would vote for the bill. There are provisions in the legislation that aid Louisiana and Indiana, states that are also relatively conservative and have Democratic Senators.

And what do we get for this? I’m still unsure; it appears to be some sort of mandatory health insurance program. What it will likely be is a lot more work for people like me, and a lot more bureaucracy. And a lot higher taxes. The bill, if it passes, will be passed on a straight party-line vote.

Senator Harry Reid’s (D-NV) healthcare legislation has 18 tax changes according to Americans for Tax Reform. Here’s a list of the taxes and their impacts (note: Dollar figures are single/single 2+ (S2) or MFJ):

1. Individual Mandate Tax. For those who don’t purchase health insurance, this will start at $95/$285 (S2) in 2014 and rise in 2016 and future years to $750/$2250.

2. Employer Mandate Tax. On businesses with 50+ employees that do not offer health care, and at least one employee qualifies for a tax credit, $750/employee. This will cause many small businesses to stop growing once they reach 49 employees.

3. Excise Tax on Health Insurance Plans. Beginning in 2013, 40% tax on plans costing $8500/$23,000. Is indexed to CPI. In high premium states such as California, many plans would pay this tax. My health insurance would likely pay this tax…and it’s not a Cadillac plan.

4. Health Insurance would be reported on W-2s. Another mandate that increases costs for business.

5. “Medicine Cabinet Tax.” Limitation on HSAs, FSAs, and MSAs to purchase non-prescription medication except insulin. Note that this is also in the House healthcare bill.

6. HSA Withdrawal Tax Increased. The tax would increase to 20% from 10%. This is also in the House legislation.

7. FSAs capped at a maximum of $2500. They are now uncapped.

8. 1099 Reporting for corporations. Requires businesses to send 1099-MISCs to corporations. This is another cost for businesses.

9. Tax on Charitable Hospitals. This excise tax of $50,000 per hospital impacts hospitals that don’t meet new Department of Health and Human Services regulations.

10. Tax on Drug Companies. The tax would be $2.3 billion based on sales percentage.

11. Tax on Medical Device Manufacturers. The $2 billion tax is also based on sales percentage.

12. Tax on Health Insurers. A $6.7 billion tax based on percentage of health insurance premiums collected.

13. Elimination of tax deduction for employer provided retirement prescription drug coverage.

14. Increase of percentage of AGI required to deduct medical expenses from 7.5% to 10%. Few can deduct medical expenses today; fewer will be able to deduct them tomorrow.

15. Compensation Limitation for Health Insurance Executives. If you work in that industry, you will be limited to a salary of $500,000.

16. Medicare Payroll Tax Hikes. Once your income exceeds $200,000/$250,000 (MFJ), you will pay an additonal 0.5% tax. Note that the employer will only collect (and be responsible for this tax) if you earn $200,000/$250,000 or more. This also impacts the self-employed. And the law is written so that the self-employed cannot deduct half of the new tax as a deduction to income tax.

17. Blue Cross Tax. There is a tax deduction available today for Blue Cross and Blue Shield companies; this tax deduction will vanish if they don’t spend 85% (or more) of premiums on clinical services.

18. Excise Tax on Cosmetic Medical Procedures. A new 5% excise tax on these procedures.

Remember, all tax increases are passed to consumers. There is no free lunch. If this legislation passes, you and I will be paying more for less.

Additionally, when government takes more, businesses either have to increase prices, cut wages, or do something else to still make a profit. If this legislation passes businesses will cut staffing. That’s basic economics, something sorely lacking in Washington.

Businesses will increase prices, but the law of supply and demand dictates that their revenues will likely decrease because of the higher prices.

I haven’t seen a tax professional speak in favor of this legislation. And I doubt I will; this measure will increase costs for businesses, lead to higher cots for consumers, and will almost certainly lead to a single-payer system. Peversely, this measure would likely lead to more business for me…for all the wrong reasons. As Joe Kristan says, “It’s unpopular, unworkable, and insane, so naturally they’re in a hurry to pass it.” Truer words have never been spoken.

Other coverage:
Roth Tax Updates
Don’t Mess With Taxes
Tax Lawyer’s Blog

Suppose you’re an amateur gambler. Say you’re a college student. You net $45,000 playing poker tournaments. When you determine your annual wins and losses you find that your gross winnings are $800,000 and your gross losses are $755,000. You take the losses as an itemized deduction, and you pay tax based on the $45,000 of income (less your exemption and any other itemized deductions).

Under the House Health Care Plan (aka PelosiCare), the hypothetical gambler would be hit with a 5.4% surtax on his $800,000 of Adjusted Gross Income, or $43,200. Ouch.

So let’s see what the taxes would be (using 2008 rates, except for PelosiCare):

Federal Income Tax: $6,113
California Income Tax: $1,907
PelosiCare Surtax: $43,200

Total Taxes: $51,220

Yes, an individual would owe $51,220 of tax on $45,000 of income; he would actually lose $6,220 by earning $45,000! Ignoring the substantive issues with health care reform, the tax portion of the legislation is mind-boggling. It would also lead to more amateur gamblers not reporting their true income (e.g. more tax evasion) and would lead to lower tax collections in the United States.

Hopefully this proposal (which apparently is now 43 pages longer–up to 2,033 pages!) will die and something that’s a lot more reasonable will take its place.

The 1990-page health care bill that the House will consider has numerous tax provisions. Americans for Tax Reform published a list of some of the changes:

- Employer Mandate Excise Tax of 0 to 8% of wages (depends on size of business);
- Individual Mandate Surtax of 2.5%;
- Flexible Spending Accounts (FSAs) limited to $2500/year;
- Non-qualified HSA Distributions would be taxed at 20% versus 10% currently;
- Income tax surtax of 5.4% on Modified AGIs over $500,000 single/$1 million MFJ (margin loan interest is not deductible for purposes of this calculation);
- 2.5% excise tax on medical devices;
- 1099s would be required for corporations; and
- “Empowers the IRS to disallow a perfectly legal tax deduction or other tax relief merely because the IRS deems that the motive of the taxpayer was not primarily business-related”.

These are just some of the tax changes in this measure.

It’s important to realize that this legislation will not be signed into law as currently drafted. It’s quite possible there will be no health care legislation passed (Americans are not in favor of the legislation), though I suspect something will be passed. Additionally, it is certain that if the Senate passes legislation it will be very different from the House bill.

This measure would lead to higher taxes on the wealthy. This would lead to more strategies by the wealthy to shelter income, which means more work for tax professionals. Additionally, the requirement that 1099s be issued to corporations would mean a lot more work for tax professionals. As I keep telling my brother, I’m convinced I have lifetime employment.