IRS: Obamacare Raised Taxes for Some Children

    When the Affordable Care Act was passed in 2010, one provision was a new 3.8% Net Investment Tax effective in 2013.  Although the tax will generally hit high-end taxpayers (threshold is $250,000 for married and $200,000 for single,) because of the way many parents choose to report their children's investment income, the tax will hit those children as well.
    While the basic application of this tax has been known since passage, the specific effects have become more apparent recently as the IRS issued its final rules, forms, and instructions.  Last Friday, the IRS published a tip on its website entitled "Tax Rules for Children with Investment Income." Included is this note regarding the Net Investment Tax [emphasis added]:

Starting in 2013, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax. NIIT is a 3.8% tax on the lesser of either net investment income or the excess of the child's modified adjusted gross income that is over a threshold amount...

    The new tax paid on children's income will be part of a so-called "kiddie tax" that stems from 1980s tax reform when Congress sought to recover taxes that were being lost on income from assets transferred from parents to children ("child" is defined as under age 19, or under age 24 if a full-time student.)  Investment income over $2,000 is taxed at the parents' highest rate instead of the rate used for regular income for the child.  And if the parents' income exceeds the NIIT threshold, the child's investment income is also subject to the additional 3.8% tax.
    The above scenario represents the simplest application of the regulations; individual situations can be more complex and will vary from person to person.  But according to a tax accountant interviewed by THE WEEKLY STANDARD for this story, "The bottom line: you will get a lot of upper-middle-class taxpayers paying an additional NIIT if they have shifted enough income-producing assets to their children via gift."  So while the tax was aimed at high-income taxpayers, it turns out Obamacare will hit some low age taxpayers as well.


Note: A version of this post first appeared at The Weekly Standard.

Maryland Delays Obamacare Small Business Exchange, Jeopardizes Tax Credits

    In mid-October, the Maryland Health Benefit Exchange quietly postponed all of the forums it had scheduled to inform small businesses about the Small Business Health Options Program (SHOP), as reported by THE WEEKLY STANDARD.  Now, in a Friday press release, the Maryland board overseeing the state's Obamacare website announced it had postponed the opening of the SHOP exchange itself from January 1 until April 1, 2014, which could impact businesses who are counting on the tax credits heavily promoted by the Obama administration to help small businesses provide coverage to their employees:

Maryland has a well- functioning small group market which offers the same prices as those that will be offered through the small group exchange, known as the SHOP. The Board approved a plan to open the SHOP on April 1, 2014, which will allow more time for testing and coordination over the next several months.

     Although the press release says that Maryland's small group market offers the same prices as SHOP plans, it does not mention that beginning in 2014, the health insurance tax credits available to businesses are only available to plans purchased via the SHOP exchanges, as noted at Healthcare.gov, and as we reported back in July.  Coverage for small businesses through Maryland's SHOP was previously able to start as early as March 1, 2014, but now that the opening of the marketplace has been delayed until April 1, the earliest date coverage can begin is unclear.  A business that desires to take advantage of the tax credits would either have to delay coverage until SHOP plans are available, or buy a plan through the conventional insurance system, and then reapply through SHOP once the exchange opens.  In either case, the tax credit would only be available for the portion of the year that SHOP coverage is in effect.
    The Maryland Health Connection website itself is also still promoting the tax credits.   It does not indicate what effect the delay will have on the ability of businesses to qualify, though it also notes that "[t]he health care tax credits and deductions are available only if you get coverage through the SHOP."
Since only premiums paid on coverage obtained through SHOP qualify for the tax credit, the calculator provided on the site to come up with a business's estimated annual tax credit is not accurate for coverage obtained during 2014 because it does not take the partial year into account.
    Although the Maryland Health Connection website does not address the effects of the delay, a presentation prepared for a Maryland Health Benefit Exchange Board Meeting on Friday, November 8, asserts that "Tax credits will not be lost – available for 2 years from first receipt."  This is an apparent reference to the fact that the tax credit is limited to two consecutive years, beginning the year coverage starts.  However, according to proposed rules by the IRS published in the federal register, the two-year limit is being interpreted as two tax years, not a 24-month period that may overlap into three different years [emphasis added]:

[T]his credit is available to any eligible small employer only twice (because the credit can be claimed by a small employer only for two consecutive taxable years beginning after December 31, 2013, beginning with the taxable year for which the small employer first claims the credit). Accordingly, no small employer will calculate the credit amount or complete the process for claiming the credit under this regulation more than two times.

    This means that an employer who obtains SHOP coverage sometime in 2014 after the exchange opens could either file for a partial-year credit for 2014 and a full-year credit in 2015, or skip filing for any credit in 2014 and then file for full-year credits in 2015 and 2016.  Since the only apparent advantage of purchasing coverage via SHOP versus the conventional insurance market is the availability of the credits, the delay in the opening of SHOP seems to amount to a de facto delay to January 1, 2015, at least for businesses intent on obtaining the maximum benefit from the tax credits.
    Unless the Maryland Health Connection can reconcile the SHOP delay with the proposed IRS rules, small businesses will be getting something less than is being promised.  An email to the Maryland Health Benefit Exchange requesting clarification on the effect of the delay on tax credits has not yet been returned.


Note: A version of this article first appeared at The Weekly Standard.

Most Popular Question at Healthcare.gov: How to Get Exemption From Lack-of-Coverage Penalty Fee?

    One day away from the launch of the Obamacare marketplaces, the question most on the minds people visiting the Healthcare.gov website is not about coverage, but rather about avoiding the penalty, or tax, for not having health insurance.  As of Monday morning, here is how the website listed its "Most Popular" items:

    As the website explains, the fee (tax) in 2014 is 1% of annual income or $95 per person, whichever is higher. The fee increases each year. By 2016 it increases to 2.5% of income or $695 per person, whichever is higher.


Note: A version of this article first appeared at The Weekly Standard.

Latest Sequestration Victim: Corporate Tax Credits

    Sequestration has been blamed for everything from cancelled White House tours to military cutbacks that threaten national security to government worker furloughs.  The latest victim of sequestration might have a more difficult time garnering sympathy, however: corporate tax credits.  The Internal Revenue Service has just announced that for corporate tax returns filed or amended on or after August 13, 2013, the "refundable portion of the credit for prior year minimum tax liability" will be cut by 38%. The announcement was made on the IRS website under the heading "Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations":

The Balanced Budget and Emergency Deficit Reduction Act of 1985, as amended, requires certain spending cuts during Fiscal Year 2013 due to the sequester triggered earlier this year. These required cuts reduce the refundable portion of the credit for prior year minimum tax liability made to corporations, which will be effective for original or amended tax returns beginning August 13, 2013.  As a result, the refundable portion of these credits will be reduced by 38 percent.  The sequestration reduction rate will be applied until the end of fiscal year (September 30, 2013) at which time the sequestration rate is subject to change depending on congressional action. 

A corporation that can claim an additional first-year depreciation deduction under section 168(k) can choose instead to accelerate the use of its prior year minimum tax credits, treating the accelerated credits as refundable credits.  Corporations making this section 168(k)(4) election and claiming a refund of prior year minimum tax credits should complete Form 8827.  These corporations will be notified that a portion of their requested refund was subject to the sequester reduction. 

Corporations making the section 168(k)(4) election but not claiming a refund of prior year minimum tax credits are not subject to this reduction. 

Note: A version of this article first appeared at The Weekly Standard. 

HHS: Small Business May Keep Current Health Plans in 2014, But Will Lose Tax Credit [TWS]

    When the Affordable Care Act passed in 2010, one provision that kicked in immediately was a Small Business Health Care Tax Credit.  The IRS explains how the fairly generous credit works:

For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities...

Here’s what this means for you. If you pay $50,000 a year toward workers’ health care premiums – and if you qualify for a 15 percent credit, you save … $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000...

    The IRS notes that a change is coming in 2014:

An enhanced version of the credit will be effective beginning Jan. 1, 2014. Additional information about the enhanced version will be added to IRS.gov as it becomes available. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively...

     While the "additional information about the enhanced version" of the tax credit is not yet available on the IRS website, the Health and Human Services (HHS) Healthcare.gov website does provide some new information, and it may prove an unpleasant surprise to those businesses and employees who were counting on President Obama's promise that if you like your plan, you can keep it (a promise he often paired with the guarantee about keeping your doctor.)  The tax credit will continue to be available and is even increasing, as the IRS website notes, but only for those businesses who purchase coverage through the government's Small Business Health Options Program (SHOP).  In bold print, the website says that: "The credit is available only if you get coverage through the SHOP Marketplace."  The following also appears under a section for further questions:

    And businesses who like their current plans?  They will be welcome to keep them... but not to keep the tax credit for which they have been eligible for the past four years.

    There is no indication on the HHS website that insurance companies will be required to offer plans to businesses on SHOP that are identical to plans businesses currently offer employees.  As the answer to the question above indicates, business must "take this into account" as they make "coverage plans for 2014."
    The president was asked about this "you can keep your plan" pledge back in 2009 in an ABC News interview with Diane Sawyer.  While the president said he lacked absolute power to force businesses to never change plans, he said no one would be "forced" to change plans [emphasis added]:

Continued the president, "So, those choices are being made by employers constantly, right?  I can't pass a law that says, 'I'm sorry, employers, you can never make changes to the health care plans that you provide your employees.' What I can say is that the government is not going to force you to, your employer or you to join a government plan, for example.  If you're happy with it, and your employer's happy with it, keep it."

    While the new rule regarding SHOP does not technically "force" companies to change plans, the loss of a tax credit potentially worth tens of thousands of dollars might be too big a pill for many small businesses and charities to swallow.  Consequently, the president's "guarantee" might ring a little more hollow than it already does.


Note: A version of this article appeared first at The Weekly Standard.

House to Consider Tax on New Flu Vaccines [Update: Bill Passed House and Senate]

    The House of Representatives is scheduled Tuesday to consider a bipartisan bill to add new seasonal flu vaccines to the IRS definition of taxable vaccines.  The Senate has already reached an agreement to vote on its version of the bill without further debate if the House passes an identical version.  If passed into law, all new seasonal flu vaccines would become subject to the 75¢ per dose vaccine tax, and also become eligible to be included in the Vaccine Injury Compensation Program (VICP).  A summary of the bill provided by the House Republican Conference explains:

The VICP is a federal program designed as a no-fault alternative to traditional tort law for resolving vaccine injury claims arising from covered vaccines.  The program is funded through a 75¢ excise tax on each dose of specified vaccines.  However, current law only covers “trivalent” (three-strain) vaccines against influenza.  Recently, many manufacturers have begun producing more effective “quadrivalent” (four-strain) vaccines, but have held off on bringing the vaccines to market until the statute is updated.  H.R. 475 amends the statute to cover all seasonal influenza vaccines under the VICP, ensuring that new, more effective vaccines are made available to the greater public.

    The balance in the VICP fund as of November 2012 was more than $3.5 billion. The fund has paid out only $2.5 billion since it was established in 1988 for cases involving all vaccines. At that rate, the balance in the fund could last another 25 years with no new revenue.  However, in response to initial reports on the legislation in April, Julia Lawless, the press secretary of U.S. Senate Finance Committee issued the following statement:

First off, the Joint Committee on Taxation is clear this bill is not a tax increase.  Secondly, the legislation is about ensuring vaccine manufacturers produce vaccines for the next flu season – not past flu seasons.  Thirdly, the threat of litigation has been so severe against these manufacturers that this compensation fund had to be created or they would not have produced these vaccines.  That threat of litigation still exists and so does the need for vaccines.  We need to be careful how that fund is financed, because having it run a deficit could be dangerous when our goal is to ensure the production of safe vaccines.

     A representative of the Biotech Industry Organization emailed The Weekly Standard to weigh in as well, and largely echoed the response of Ms. Lawless, concluding with:

This is an extremely important public health matter. 

The issue before Congress is whether the newest seasonal influenza vaccine will be covered by the VICP in time for the 2013-14 flu season. 

The other issue raised by the article about the balance in the fund is an entirely separate matter that would require in-depth analysis by experts in the field[.]

     The documentation accompanying the proposed legislation does not indicate whether or not any such analysis of the fund has been conducted.  The tax on flu vaccines raises about $100 million each year.  The "trust fund" is invested in Treasury Bills, helping to finance the national debt.



UPDATE: The bill passes the House, the Hill reports:

The House on Tuesday afternoon approved legislation meant to ensure an ample supply of the latest flu vaccine is available by the next flu season.
By voice vote, members approved H.R. 475, which would include a flu vaccine that attacks a new strain of flu on a list of taxable vaccines.

UPDATE 2: The Senate has also passed the bill, the Hill also reports.  The legislation now heads to the White House for the president's signature.



Note: This article first appeared at The Weekly Standard.

Congress Prepares Flu Vaccine Tax [Clarification added]

    Congress is preparing to take action on a bipartisan proposal to raise taxes on flu vaccines. This is not a tax on the wealthy, but rather on a broad swath of Americans, or at least those who choose to be immunized against the flu.
    In February, identical bills were introduced in the House and Senate to add seasonal flu vaccines to the IRS code as taxable.  The legislation would exact a 75¢ per dose tax on any "vaccine against seasonal influenza."  Given that the Centers for Disease Control projects that 135 million doses of flu vaccine will be used this year, the government's take on flu vaccines alone is over $100,000,000 per year.
    Along with taxes on other vaccines, this tax would fund the Vaccine Injury Compensation Trust Fund.  The fund is a "no-fault alternative to the traditional tort system for resolving vaccine injury claims that provides compensation to people found to be injured by certain vaccines."  However, the fund is by no means in the same kind of trouble that other government "trust funds" are.
    The balance in the fund (as of November 2012) was more than $3.5 billion.  Since the program's inception in 1988, the fund has paid out only $2.5 billion in 25 years for cases involving all vaccines, not just the flu vaccine.  This means the balance in the fund could conceivably last another 25 years with no further tax revenue.
     The House bill (H.R. 475) was submitted on February 4th by Republican Jim Gerlach with Democrat Richard Neal co-sponsoring, and the Senate version (S. 391) was submitted by Democrat Max Baucus and co-sponsor Republican Orrin Hatch.  The same legislation had been introduced in the 112th Congress just months ago.  The House version died in committee, but the Senate version actually passed by unanimous consent the day it was introduced.
    Now, a posting on the Senate website reports that the Senate has reached an agreement on the current legislation. Although this flu season is winding down now, the tax could easily be in place by next winter if the House follows suit and the president signs it:

The Senate reached an agreement that if the Senate receives H.R.475 from the House of Representatives and the bill is identical to the text of which is at the desk, then the bill be read three times and the Senate proceed to a vote, at a time to be determined by the Majority Leader in consultation with the Minority Leader, with no intervening action or debate. H.R.475, a bill to amend the internal Revenue Code of 1986 to include vaccines against seasonal influenza within the definition of taxable vaccines.

    As is the case with all government "trust funds," there is no cash set aside to pay out claims.  According to the November 2012 report on the vaccine trust, the $3.5 billion balance is invested in "US Treasury Securities."  In other words, financing a portion of the $16.5 trillion national debt.


Note: This article first appeared at The Weekly Standard.



Clarification:
The current IRS code definition of a “taxable vaccine” already includes “Any trivalent vaccine against influenza.”  The new law reads that “Subparagraph (N) of section 4132(a)(1) of the Internal Revenue Code of 1986 is amended by inserting 'or any other vaccine against seasonal influenza' before the period.”  This is to make sure that all future flu vaccines are taxable in addition to the current ones.  Some interpreted my original article to mean that no flu vaccines were previously taxable, and now they would be.  The discovery that previous flu vaccines have ben taxable all along is not likely to assuage the anger many have expressed, especially in light of the $3.5 billion balance in the "trust fund."