Tax Planning

Experts highlight the tax issues every financial adviser should know

Potential tax impact of health care act repeal

It's likely that a replacement health care plan would have some tax impact, leading to new planning opportunities for financial advisers and their clients

Jan 20, 2017 @ 11:58 am

By Tim Steffen

The new Republican-controlled Congress has taken the first steps toward their goal of repealing the Affordable Care Act, and President Donald Trump has set a Jan. 27 deadline for repeal to be completed. The new administration has said that ACA repeal would happen simultaneous to a replacement program being enacted. Given the complexity of a replacement bill, a delay in that repeal deadline would not be surprising.

Republicans have also said that individuals who are covered under the current act will not lose their coverage, so it's realistic to expect the ACA to continue to remain in place for a period of time, even after a repeal vote.

The repeal process could result in a blanket repeal of the entire act, rather than just eliminating specific provisions. In that case, a variety of health and non-health related rules would be impacted, including several tax laws. What follows are some of the items that would be impacted by a full repeal. It's important to note that the replacement plan Republicans plan to introduce has yet to be released. It's very possible that some of these provisions could return in whatever replacement is ultimately proposed.

MEDICARE TAXES

Two of the most impactful taxes that were included in the original health care act were designed to support the Medicare program, with both applying to couples with income over $250,000 (singles over $200,000):

• 3.8% tax on net investment income

• 0.9% increase in the Medicare tax on earned income (wages, self-employment, etc.)

The 3.8% tax on net investment income applies to capital gains, as well as interest, dividends and other items. Taxpayers who are paying this tax, or who are just below the income threshold, have likely been investing in a way that limits its impact. Its repeal might be enough to encourage those investors to realize gains they had been deferring, or to structure their portfolio to generate more income than in the past.

OTHER TAX CHANGES

Other tax changes that would occur with a full repeal of the ACA include:

• The floor for deducting medical expenses would be lowered from 10% of adjusted gross income to the previous level of 7.5%. This change would enable more individuals to claim a medical expense deduction. However, the medical expense deduction floor under the alternative minimum tax would remain at 10%, which could result in pushing some taxpayers into the AMT.

• The penalty for not purchasing health insurance would be repealed. For 2017, this penalty is roughly the lesser of $695 per uncovered family member (up to $2,085) or 2.5% of income.

• The penalties on employers who don't offer health care coverage to their employees (and aren't otherwise exempt from the requirement) would be eliminated.

• The premium assistance tax credit that helps some taxpayers offset the cost of health care would disappear.

• The penalty on non-medical related withdrawals from health savings accounts would be reduced from 20% to 10%.

• The tax on employer health plans that exceed a certain value (known as the Cadillac tax) would be repealed. This tax was originally supposed to take effect in 2018, but was later deferred to 2020.

SIGNIFICANT IMPACT

It's always difficult to project the impact of any legislation until the final version has been released and analyzed, but by repealing the ACA in its entirety, we know these changes would take effect — not to mention the significant impact on how health care is provided today. It's also likely that a replacement health care plan would have some tax impact as well, leading to new planning opportunities for financial advisers and their clients.

Tim Steffen is director of financial planning for Robert W. Baird & Co. Follow him on Twitter @TimSteffenCPA.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

Why does social media matter for financial advisers?

Social media is a reflection of who you are. But who are you as a financial adviser? Debra Bednar-Clark of DB+co offers some solutions to enhance your practice.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

RIAs struggle to keep clients grounded amid stock market euphoria

With equities at record levels, financial advisers are confronted with realities of greed and fear.

Regulators showing renewed interest in cracking down on investment fees

SEC, Finra targeting high-fee share classes, 12b-1 fees and failure to give sales load discounts and waivers to investors.

Complexity of new indexed annuities causing concern

Insurers are using 'hybrid' indices as a way to differentiate themselves, but critics contend the products are less transparent, more confusing and don't add financial benefit.

Critics say regulation hasn't curbed overly rosy projections for indexed universal life insurance

They say rule didn't go far enough and more stringent measures may be necessary.

Broker, retirement groups make last-minute pleas to change tax legislation

Pass-through provisions are target of groups representing employee-model brokerage firms, as well as retirement plan advisers.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print