Posts Tagged ‘obamacare’

In early March, GOP leaders Kevin Brady and Paul Ryan unleashed their plan to repeal and replace Obamacare, publishing proposed legislation in the form of the American Health Care Act. Last week, the Congressional Budget Office released its score of the plan, and two of the primary criticisms that emerged from the report were as follows:

  1. The plan results in an $880 billion tax cut over the next decade, with at least $274 billion of the cuts going directly into the pockets of the richest 2%, and
    Medicaid would be cut by an equivalent $880 billion over the next decade, making it more difficult for low-income taxpayers to procure insurance.
  2. Last week, the GOP released amendments to its health care bill, and in response to the shortcomings highlighted by the CBO report, the changes to the bill would add more tax breaks for the rich and further slash Medicaid funding.

Continue reading on Forbes.com


Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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Last week, GOP leadership revealed its long-awaited plan to repeal and replace Obamacare by publishing the American Health Care Act. Rather than representing a unifying piece of legislation for the Republican party, however, the proposed legislation created an immediate division within the GOP, with many leading Republicans derisively calling the plan “Obamacare Lite” and others questioning the impact it would have on the number of insured individuals, or stated more appropriately, the number of insured voters in advance of the 2018 mid-term elections.

Despite the lukewarm reception with which it was met, the American Health Care Act moved through the House Ways and Means Committee along party lines; though it did require 18 hours of debate, with Democratic committee members decrying the Committee’s willingness to move the bill forward without a complete measure of its cost or the lost insured.

Yesterday, the Congressional Budget Office answered those questions, releasing its official scoring of the American Health Care Act, and the results are not pretty. An $883 billion tax cut, $274 billion of it going to the richest 2%. $880 billion stripped from Medicare. And 24 million fewer insured individuals over the next ten years.

Let’s take a look at how the CBO came up with the numbers it did. But first, we need to understand a bit about how Obamacare works.

Continue reading on Forbes.com.


Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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So last night, as I was trolling the Drudge Report for the latest in election news and teacher-student sex scandals, I noticed an article tilted “These are the Top 5 Worst Taxes ‘Obamacare’ Will Impose in 2013.”

Apparently, the list was first authored by the Grover Norquist-founded Americans for Tax Reform, a Section 501(c)(4) lobbying group that opposes “all tax increases as a matter of principle.”

In running through the list, I came upon #2: The ‘Obamacare’ ‘Haircut’ for Medical Itemized Deductions, which read as follows:

Currently, those Americans facing high medical expenses are allowed a deduction to the extent that those expenses exceed 7.5 percent of adjusted gross income (AGI). This tax increase imposes a threshold of 10 percent of AGI. By limiting this deduction, Obamacare widens the net of taxable income for the sickest Americans. This tax provision will most harm near retirees and those with modest incomes but high medical bills.

This, as you might expect, led to a spate of misspelled, grammatically incorrect reader comments about how Obamacare unfairly punished the elderly. There’s just one problem with this sentiment: it’s not accurate.

Yes, Section 213(a) of the Code was amended to increase the AGI threshold from 7.5% to 10% starting in 2013, meaning taxpayers will now have to generate medical deductions in excess of an extra 2.5% of their adjusted gross income before they begin reaping tax benefits. This much is true. But when the Americans for Tax Reform write — This tax provision will most harm near retirees  — and readers pile on by decrying President Obama’s willingness to screw over the elderly —  it tells me that these people didn’t actually read the new law.

Had they bothered to continue reading a few lines further into Section 213, they would have discovered that Section 213(f) was also amended, and it now provides:

(f) Special rule for 2013, 2014, 2015, and 2016.
In the case of any taxable year beginning after December 31, 2012, and ending before January 1, 2017, subsection (a) shall be applied with respect to a taxpayer by substituting “7.5 percent” for “10 percent” if such taxpayer or such taxpayer’s spouse has attained age 65 before the close of such taxable year.

In other words, the increase to the AGI threshold will not, as the AFTR’s report states, harm near retirees or the elderly, because for the next four years, the AGI threshold is not increased if either the taxpayer or the spouse is over 65. For all of those 65 and over in 2013, their medical expenses will be treated the exact same way in they were in 2012. And let’s be honest, in today’s economy, if you’re retiring before 65, you’ve got enough money that your medical expenses probably aren’t going to exceed 7.5, 10, or even 30% of your adjusted gross income.

Now that I’ve addressed that tiny bit of legislative minutiae and done my part to stem the spread of tax misinformation among people who are so rational they are still calling for the President’s birth certificate four years after his election, I can rest knowing that I’ve left the world a slightly better place.

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The following email came into Double Taxation HQ today from one of my firm’s high-ranking auditor types, and it seemed befitting of its own post:

Dear Tony,

You look very handsome today; I just thought you should know. Is the below email I had forwarded to me true, or is this just someone that doesn’t understand what they are reading?


> Have you seen this?

> When does your home become part of your health care?…….. After 2012!

> Your vote counts big time in 2012, make sure you and all  your friends and family know about this!


> I thought you might find this interesting, — maybe even SICKENING! The National Association of Realtors is all over this and working to get it repealed, — before it takes effect. But, I am very pleased we aren’t the only ones who know about this ploy to steal billions from unsuspecting homeowners.

How many realtors do you think will vote Democratic in 2012?  Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That’s $3,800  on a $100,000 home, etc. When did this happen? It’s in the health care bill, — and it goes into effect in 2013. Why 2013? Could it be so that it doesn’t come to light until after the 2012 elections? So, this is a change you can believe in?

> Under the new health care bill all real estate transactions will be subject to a 3.8% sales tax. If you sell a $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation, — who often downsize their homes. Does this make your November,  2012 vote more important?

> Oh, you weren’t aware that this was in the Obama Care bill?  Guess what; you aren’t alone! There are more than a few  members of Congress that weren’t aware of it either.

I hope you forward this to every single person in your address book.


Thanks for your help, Tony. Did I mention you look handsome today?

Hugs and Kisses,


[Ed note: we may have taken some creative liberties with the auditor’s email for presentation’s sake, but the thrust of the question and the forwarded chain email remains unchanged.]

To answer your question, Jeff: whoever forwarded the email is perfectly right to be confused by the implications of Obamacare. Whoever crafted this email, on the other hand, is an idiot. Not because they misinterpreted the Patient Protection Act — that’s a simple mistake — but because they got so righteously indignant while all the while being grossly misinformed. Unless of course, the chain email was authored by Mitt Romney, in which case, he’s stupid like a fox.

As we’ve previously discussed, starting in 2013 Obama will indeed tack an additional tax of 3.8% on a taxpayers’ net investment income — which would include gain from the sale of a home — but this is an additional income tax, not a sales tax.

The designation is important, because income tax is only paid on realized and recognized gains that are not otherwise excluded from income, while sales tax — as is indicated in the chain email — is paid on the absolute sales price.

Why does this matter? Because assuming the home being sold is a primary residence and otherwise satisfies the requirements of I.R.C. § 121, a married taxpayer can exclude up to $500,000 of gain from the sale of the residence. Thus, even though a taxpayer may recognize a $499,999 gain from the sale of a home, if it is excluded from taxable income under Section 121, there is no taxable gain upon which to assess the 3.8% additional tax.

The originator of the email above would have you believe that the 3.8% tax would be assessed on the purchase price, and that is simply not the case. Since no gain is recognized courtesy of Section 121, no capital gains tax — including the 3.8% addition provided for in Obamacare –is assessed on the sale.

Section 121 takes out much of the sting of the 3.8% tax increase, but there are other limitations to the Obamacare surcharge as well. For example, the tax is only assessed on those with adjusted gross income in excess of $250,000. If your AGI is below the threshold, the 3.8% increase won’t kick in.

Of course, as with all chain emails, there is some truth to be found: if a taxpayer sells a home in 2013 and either 1) the gain exceeds $500,000 or 2) Section 121 doesn’t apply for some other reason, AND the taxpayer has AGI in excess of $250,000, the taxpayer will pay an additional 3.8% tax next year.  However, as noted above, that 3.8% tax will be assessed on the net gain, not the sales price.

Hopefully this clears things up. For more information, consult your local library.

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While the Supreme Court’s decision to uphold Obamacare has left half of the nation readying plans to renounce their citizenship and flee to Canada, the rest of us who stick around have to deal with the aftermath. And while to date, the individual insurance mandate has been the target of much of the ire, my guess is that sooner rather than later the nation’s attention will turn where it likely belongs: on the 3.8% surtax set to be imposed on investment income beginning in 2013.

The surtax will apply only to those with AGI in excess of $250,000 ($200,000 for single taxpayers), but when coupled with the slated increase in the preferential tax rates currently afforded long-term capital gains and qualified dividend income should the Bush tax cuts expire, those taxpayers affected by the increase are staring at a doubling — or in some cases tripling — of the tax rates they currently pay.  

To illustrate, should the Bush tax cuts expire, the tax rate imposed on long-term capital gains is set to rise from 15% to 20%. Tack on the 3.8% surtax for appropriate taxpayers, and you’re looking at a 8.8% rise from 2012 to 2013, an increase that will — and should — have taxpayers considering accelerating the sales of investments and businesses into 2012.

Similarly, courtesy of the Bush tax cuts, taxpayers have enjoyed a 15% tax rate on qualified dividend income for over a decade. Should those cuts expire, all dividends will again be taxed at a top rate of 39.6% plus the 3.8% surtax, meaning the dividend rate will increase from 15% to 43.4% with the turn of the calendar.

Of course, few experts expect the Bush cuts to expire at year-end; rather, a short-term patch is the more likely answer. In that case, the top tax on both long-term capital gains rates and qualified dividends will increase only by the 3.8% surtax — from 15% to 18.8%, while the top rate applied to interest income will increase from 35% to 38.8%.

While the leading question facing questions in light of the increasing tax rates may well be, “Should I sell my business in 2012?” there are other concerns that need to be addressed as well.

For example, assume a client owns many rental properties that, in total, generate significant income. An election treat the taxpayer as a “real estate professional” under I.R.C. § 469(c)(7) has never been necessary, because the taxpayer is not generating losses. In fact, you’ve preferred to treat the client’s interests in the rental activities as passive, because the client has other non-rental passive investments that generate losses and can partially offset the passive rental income.

But starting in 2013, the 3.8% surtax is slated to be applied not only to long-term capital gain, dividend and interest income, but also to rental income. While the Patient Protection Act is largely bereft of guidance on how the surtax will apply to rental income, certain questions are raised:

If I don’t make the election to treat the client as a real estate professional, does all the rental income become subject to the 3.8% tax, or would material participation suffice?

If material participation will suffice, will I need to make the election to aggregate all the activities in order to meet the tests under Section 469?

If I make the election, the rental activities are no longer treated as passive. Thus, the non-rental passive losses the client generates will no longer have passive income available to offset, and will be suspended under I.R.C. § 469. Is trading the 3.8% surtax for the inability to use the passive losses worth it?

I don’t know the answer yet, and in all likelihood, neither does the IRS, since they have not issued formal guidance, likely waiting like the rest of us to see what the Supreme Court decided to do with Obamacare.

Of course, even with the Supreme Court’s blessing, the fate of the surtax is still shrouded in a bit of uncertainty, as there is the matter of the election to come this November. Should Mitt Romney prevail, the first thing on his to-do list would be to repeal the Patient Protection Act, and send the 3.8% surtax with it. Should that happen, it would make the decisions to accelerate investment income into 2012 — whether on the sale of publicly traded stock or closely held business look rather rash and ill-conceived.

In the meantime, however, I’ve scoured the interwebs, and as she always does, Laura Sanders over at the WSJ did a great job dissecting the the looming surtax. I highly recommend you give it a read.

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The individual insurance mandate contained in Obamacare might well be doomed, leaving experts to ponder how the government can achieve its dual goals of providing health coverage for all citizens and driving down the price of care without the threat of a legal challenge. From Bloomberg:

The alternative that comes closest to preserving the mandate would be to give tax credits to everyone who carries health insurance. That’s functionally the same as fining those who don’t have coverage, and less subject to constitutional challenge. It’s essentially the approach being advocated by House Budget Committee Chairman Paul Ryan, a Wisconsin Republican who would provide refundable tax credits, usable solely for buying health insurance, of $2,300 for individuals and $5,700 for families.

Of course, as Bloomberg astutely points out, if you can work around the constitutionality of a mandate by simply granting a tax credit instead of a penalty, it tends to trivialize the three days the Supreme Court spent debating Obamacare. Martin Sullivan at Tax.com further highlights the silliness of the situation:

The only difference between the mandate and your common tax incentive is that Congress framed the incentive as a tax penalty instead of a tax break. I recognize there might be a legal difference between the two approaches that is beyond my comprehension. But the Court, Congress, and the public should understand that economically the two approaches are exactly the same. Any tax penalty can easily be redesigned as a tax incentive. So, for example, a $1,000 tax penalty for not doing X could be replaced by a tax policy whereby all individuals’ taxes are raised by $1,000 and then they are given a tax credit of $1,000 for doing X.

Sullivan goes on to illustrate his point with the following chart (click to enlarge)

Assuming a tax credit isn’t an option, what else can be done to make sure we all get health insurance? Remember, the more people that are properly insured, in theory, the more the cost of insurance should come down for the masses.

Bloomberg offers a couple of choices:

If the credits don’t fly, another way to maneuver people into buying insurance without a mandate is to warn them that their premiums will go up if they put off getting covered. Medicare has late enrollment penalties for both Part B doctors’ and outpatient coverage and Part D prescription drug coverage. The Part D penalty is 1 percent of the premium for each month after age 65 that someone enrolls. 

A related idea, used in most company health plans, is to give people just one opportunity per year to sign up. That way they can’t game the system by waiting until they’re sick or hurt to rush to buy a policy. If they miss the deadline, they have to buy coverage at whatever price the market will bear — which could be prohibitively high for the seriously ill. That might be more punitive an idea than America can stomach.

And if all else fails, the government can always resort to simply paying professional athletes to tell us to buy insurance, because who better to take financial advice from then grown men with high school educations who’ve made exorbinant sums of money playing catch.  As silly as it sounds, it works.  In baseball-crazy (since 2004) Massachusetts, players from the Red Sox took time away from getting loaded in the clubhouse to urge people to get covered, and now more than 98 percent of state residents have health insurance.

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The opening day of the Supreme Court’s hearings on the Patient Protection and Affordable Care Act went pretty much as expected, with 90 minutes spent arguing semantics; specifically, whether the tax penalty imposed by I.R.C. § 5000A on individuals who fail to procure health insurance is more “tax” than “penalty.”  

As a reminder, today’s debate could have ended the highly anticipated hearing on the constitutionality of the individual insurance mandate before it began. If the I.R.C. § 5000A penalty was found to be a “tax,” then the Supreme Court would be barred from ruling on the  constitutionality of the insurance requirement by the Anti-Injunction Act — a 145-year old law — until after the tax has been imposed and collected — 2015 at the earliest. If the penalty is truly a “penalty,” however, then the Court can move forward with the argument everyone is longing to hear and determine the fate of Obamacare.

Well, we’ve perused the transcript from today, and while this is nothing more than our opinion, it appears that the majority of justices are in favor of settling the constitutionality debate sooner rather than later. If you’re scoring at home — and if you are, your loneliness saddens me — it would appear from the transcript that Justices Ginsburg, Scalia, Breyer, Kagan and Sotomayor are in favor of addressing whether Obamacare is constitutional now, while Justices Roberts and Alito would prefer to apply the Anti-Injunction Act and table any constitutionality discussion until 2015. It should be noted that it doesn’t appear that politics were the overriding motivation for any of the justice’s positions, as both conservative (Scalia) and liberal (Kagan) seemed to agree that the Anti-Injunction Act did not apply to I.R.C. § 5000A.

Perhaps the most fascinating aspect of the day was the unenviable position in which the government’s attorney -U.S. Solicitor General Donald Verrilli — found himself. Today, Verrilli vehemently argued that the I.R.C. § 5000A charge was not a tax but a penalty, and thus the Supreme Court was not prohibited from ruling on the provision’s constitutionality prior to the date the tax is collected. Verilli’s argument was made all the more difficult by the fact that everyone in attendance was keenly aware that tomorrow, when justifying the insurance mandate as constitutional, Verrilli would be back in the very same court room arguing that the I.R.C. § 5000A charge is in fact a tax, and is imposed as part of Congress’s taxing authority. Verrilli articulated his dueling positions thusly:  

Congress has authority under the taxing power to enact a measure not labeled as a tax, and it did so when it put section 5000A into the Internal Revenue Code. But for purposes of the Anti-Injunction Act, the precise language Congress used [calling it a penalty, rather than a tax] is determinative.

Verrilli wasn’t the only one in a tough spot on Monday. While the various states challenging the law are chomping at the bit to challenge the constitutionality of the insurance mandate, because both sides would prefer to determine the fate of Obamacare soon, no one was jumping at the chance to argue that the I.R.C. § 5000A tax penalty is in fact a tax, and thus subject to the Anti-Injunction Act. So to facilitate debate, the Supreme Court brought in their own attorney to do so, Robert Long.

Mr. Long — likely longing for his care-free days as a member of the popular rap group Black Sheep[i] — was stuck spending 30 minutes trying to convince some of the brightest people on the planet of something they appeared to have already decided they wouldn’t be convinced of. To be fair, the justices went easy on him., but there can’t be anything fun about getting hired to engage in an argument you know you can’t win.

Up today is the main event: the discussion of whether Congress has overstepped its taxing authority in requiring all American’s to obtain health insurance or suffer a tax…penalty…whatever. We’ll let you know how it goes.

[i] Not verified. May be an entirely different Mr. Long.

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