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
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.

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