HR3962 : Division A : Part Two

Before I begin tonight, I need to backtrack a bit and remind you that HR3962 establishes the new Health Choices Administration, the Health Choices Commissioner, and the Health Insurance Exchange just like HR 3200 contained. The Secretary of Health and Human Services, as well as this new Commissioner will dictate every aspect of the new government controlled “exchange plans”.

The Health Choices Commissioner will have the authority to audit every qualified health benefits plan to see if the plan meets all government criteria and whether or not that plan has violated any government regulation. As written in this bill (like HR 3200) there is no limit to this authority and leaves the door wide open for abuse by the HCC.

I still have 12 pages of notes on my desk to get through, and somehow I skipped that interesting tidbit in my review last night. In this post I will pick up right where we left off, with additional taxes and “credits” in Section 521 on page 318.

In previous sections we learned that a small business owner could potentially pay almost $28,500 in taxes (as penalties) when he/she makes just $100,000 per year. Section 521 gives that small business owner an “employer health coverage tax credit”.

The default amount for that credit is 50% of what that small business owner pays in health care costs based on the employee, if they have 10 employees or less.

In the case of an employer whose average annual employee compensation for the taxable year exceeds $20,000, the percentage specified in paragraph (1) shall be reduced by a number of percentage points which bears the same ratio to 50 as such excess bears to $20,000.

On page 319 we learn that there will be no credit for the employer if the employee makes $80,000 or more. I don’t know about you, but I foresee a big reduction in salaries as a way for employers to receive a larger credit from the government. Oh, and HR3962 makes sure that credit is not permanent. It only applies for two taxable years. Generous huh?

Section 531 changes the way you’ll be able to use your Health Savings Account, Flexible Spending Accounts, or Health Reimbursement Arrangements. Thanks to this section you will no longer be allowed to use those accounts to purchase non-prescription medications which will in turn raise the amount of taxes you pay on your income because you’ll no longer be able to use non-taxed money to make those purchases.

Flexible Spending Accounts help American’s budget their medical and health needs throughout the year, and thus far have been uncapped. Section 532 changes this by capping FSA’s at $2,500 per year. Section 533 increases the penalty for nonqualified distributions (like purchasing non-prescription medication) from 10 percent to 20 percent. Yes, you read that correctly. HR3962 will cut the number of qualified items and services you can purchase with your FSA while doubling the penalty for those non-qualified purchases.

Section 534 eliminates the current tax deduction for employer based health plans which coordinate with Medicare Part D, which will make private health insurance participation in Medicare non existent (while that private health insurance exists anyway).

Section 551 imposes a surtax on anyone who finds success and earns a high income because of that success. According to this section, those individuals who make more than $500,000 (modified adjusted gross income) will pay an additional surtax (yes, this is another reference to another newly defined tax) of 5.4%.

(a) General Rule- In the case of a taxpayer other than a corporation, there is hereby imposed (in addition to any other tax imposed by this subtitle) a tax equal to 5.4 percent of so much of the modified adjusted gross income of the taxpayer as exceeds $1,000,000.

(b) Taxpayers Not Making a Joint Return- In the case of any taxpayer other than a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), subsection (a) shall be applied by substituting ‘$500,000’ for ‘$1,000,000’.

This new surtax will raise the top tax rate of 39.6% to 45%. Yes. If you make $500,000 per year you will pay 45% income tax. It seems that the lawmakers who wrote this bill are a bit jealous of those who find success and this is their way of sending a message that they would prefer them not to be successful.

Think about it. If you make $500,000, you’ll be paying an additional $27,000 simply for being successful. In total, if you sit at the highest tax rate and you make $500,000, you’ll end up paying $225,000 in taxes and end up with a net total of $275,000. Your counterpart, however, who makes $499,000 will pay $197,604 and end up with a net total of $301,396. In other words, if you make $1,000 more than your counterpart, your counterpart will take home $26,396 more than you will.

Those Democrats sure have a great way of congratulating you for your success, don’t they? Hang in there. At this point you still have some income left and we still have at least five new taxes to discuss here.

Section 552 implements a new excise tax of 2.5% on the manufacture of medical devices, Section 553 requires the reporting the “exchanges of property” in addition to income on 1099-MISC forms as well as requiring corporations to report payments to other corporations, not just individuals, Section 554 delays corporate tax relief from the American Jobs Creation Act for nine years, and Section 561 places limitations on tax treaty benefits for certain deductible payments, which will allow for double taxation on some earnings.

I’ll take a moment to pause right here and reflect on the fact that a delay in tax relief is basically the same as imposing a new tax. I’ll wait another moment too, so those who got lost because we moved so quickly through that last paragraph can have a chance to catch up with the rest of us.

Section 562 gives the Internal Revenue Service a new unbridled power under the title “Economic Substance Doctrine”, where the IRS will be permitted to disallow legitimate tax deductions

ECONOMIC SUBSTANCE DOCTRINE- The term ‘economic substance doctrine’ means the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose.

If the IRS believes the motive for the deduction was not primarily business related, the IRS, in it’s own determination will decide whether or not the deduction is allowed. This section does not define the appeal process, if there is any, regarding the new ‘economic substance doctrine’.

Too bad our own government isn’t required to follow some sort of economic substance doctrine.

According to Section 563, partnerships and corporations that make more than $100,000,000 (100 million dollars) are “more likely than not’ to make underpayments on their taxes and HR 3962 aims to hold them “more likely than not” accountable.

In the case of any specified person, paragraph (1) shall apply to the portion of an underpayment which is attributable to any item only if such person has a reasonable belief that the tax treatment of such item by such person is more likely than not the proper tax treatment of such item.

With that, we have finished Division A. I’ll have another post this afternoon beginning with Division B on page 366.