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Posts Tagged ‘obamacare’

A few summers ago, my wife and I marked our ten-year wedding anniversary with a three-day getaway to Block Island. Our first night on the island, we went out to dinner, and while we awaited the arrival of our food, my wife shared the story of friend who had recently gotten a new job, and when she and her husband arrived at the restaurant that night to celebrate with dinner, the husband had thoughtfully arranged to have a bottle of champagne waiting at the table with a note that read, “Congratulations!”

Maybe my wife meant that as a hint; maybe she didn’t. That’s when it dawned on me: Ten years is a big deal. There are expectations involved. I should probably live up to them.

In recent days, President Trump found himself in the same uncomfortable situation I endured at that table in Block Island. Soon to mark his 100th day in office, he realized that he had done nothing to fulfill his promise to deliver a “phenomenal tax plan.” So as I did during dinner with my wife, the President scrambled for the best solution he could: a rushed, half-hearted gesture meant merely to meet his minimum obligations. There was no plan. There were no details. There was, quite literally, a one-page release with a handful of bullet points, that only served to raise more questions than answers.

But before we get to those questions, let’s take a quick look at the “plan.”

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

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The flames had not yet cooled on the American Health Care Act — the GOP’s seven-years-in-the-making plan to repeal and replace Obamacare — before Republican leaders had moved on to its next top priority: tax reform. And from that emphatic pivot was born a golden moment for people like me; after all, it’s not often that tax law rises to the forefront of the public consciousness. But that’s where we’re heading…maybe for mere weeks, but possibly for months or — dare I say it? — years. A time where discussions of deductions and talk of tax brackets will dominate newspaper pages, Facebook timelines, and Twitter feeds.

Sure, these rare moments serve as career validation for people who have made the ill-advised choice to spend their lives in the bowels of the tax law, but debates over reform of those laws shouldn’t be preserved solely for us. Everyone should get in on the fun, and to that end, here’s a little primer for you: five headlines you’re sure to read about tax reform as the process unfolds.

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

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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.

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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.

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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?

HOME SALES TAX

> 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!

> HOME SALES TAX

> 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.

> VOTERS NEED TO KNOW.

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

Hugs and Kisses,

 Jeff.

[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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