Legislators have been working overtime for the past 12 months, but with all the buzz surrounding this renewed Congressional action, tax implications of new legislation are often overlooked.
In brief, there are three significant pieces of legislation that could affect taxpayers. The first is an extension of tax provisions such as Section 179 deductions that benefit small businesses. Several years ago, limits on Section 179 depreciation and bonus deductions were raised to encourage business spending. Extensions to these raised limits have passed in the House but not yet in the Senate. Similarly, the House voted to extend into 2010 a tax on estates that was originally set to expire at the end of 2009. However, the Senate has not yet passed a bill extending the estate tax into this year.
The third piece of legislation continues to be debated on both the House and Senate floors a comprehensive health care reform bill. While each house of Congress has passed its own version of the bill, a uniform piece of legislation still eludes lawmakers.
“Any taxpayer would be well served to be fully aware of the tax provisions contained within these three bills,” says Walter M. McGrail, JD, CPA, a senior manager at Cendrowski Selecky PC. “However, while the implications of Section 179 and estate tax bills are more frequently discussed, those related to the health care bill have attracted little attention to date.”
Smart Business spoke with McGrail about the two versions of the health care bill, the tax provisions included within them and what expectations taxpayers should form regarding pending legislation.
What is the major difference between the House’s health care bill and the Senate’s?
What will attract the most attention is the different ways the House and the Senate approached paying for health care reform.
The House bill contains a provision to tax high-income individuals. This would create a surtax on anyone making more than $1 million if married/filing jointly, or more than $500,000 for any other taxpayer. If you surpass those limits, you will have to pay an additional 5.4 percent on all the income that goes over the limit.
The Senate took a different route by increasing the Medicare tax on wages and self-employment income over certain limits. The current combined employer and employee tax on self-employment income is 2.9 percent. The Senate’s bill would raise the rate an additional 0.8 percent, to 3.7 percent, effective for all wages and self-employment income in excess of $250,000 if married/filing jointly, or in excess of $200,000 for all other taxpayers.
Is there any other part of either bill that taxpayers should be aware of?
Part of the Senate plan includes an excise tax on so-called ‘Cadillac plans’ an excise tax of 40 percent to be levied on insurers that have medical benefits that exceed a certain dollar threshold for covered insureds.
If the cost of a single person’s plan is in excess of $8,500, there will be a 40 percent tax on the excess. For family plans, the 40 percent tax will kick in on anything in excess of $23,000.
While this seems to only apply to insurance companies, the excise tax also extends to self-insured employers. If a medium to large company decides that it wants to self-insure for medical costs, that same 40 percent excise tax applies on the same levels of benefits.
As far as to which plan is ‘better,’ it all depends on where you stand. If you’re making, say, between $500,000 and $700,000 per year in wages or self-employment income, you’ll definitely like the House’s surtax on people making more than $1 million. If you’re making more than $1 million a year in income of any source including interest, dividends and capital gains income you’d much rather see the Senate’s version that taxes wages and self-employment income.
Depending on what your source of income is and what your level of income is, you’re going to have a vested interest in one plan over the other.
What, if anything, can taxpayers do to prepare for these changes?
When tax changes are on the horizon, you usually have a fair amount of opportunity to prepare for those changes. But since there are two versions of the bill each with its own tax on different types of income streams and no one knows what version will be passed, planning becomes more difficult.
However, if the Senate bill passes, you’ll see many people employ a longstanding technique of avoiding wages and self-employment income. For example, if a small business owner who operates an S Corp makes $1 million in a year and pays himself $1 million in salary, he would be subject to the wages and self-employment surtax.
However, if that same business owner paid himself a more reasonable salary, say $100,000, and took the other $900,000 as distribution on earnings from the S Corp, then he would avoid wage and employment taxation.
If the House bill is enacted, things get tougher. It’s pretty hard to hide from income.
You can do things such as salary deductions to get under $1 million for the year or postpone income where possible, but it’s not likely that anyone would forgo income to avoid an additional 5.4 percent of taxes.
Once you’re over the limit, you’re over, and you’re paying the surtax.
WALTER M. McGRAIL, JD, CPA, is a senior manager at Cendrowski Selecky PC. Reach him at (248) 540-5760 or firstname.lastname@example.org.