13 Upcoming Tax Changes

[youbet]

I'm interested in comments concerning the potential impact of these upcoming tax changes on the economy in general and on the ability of current worker bees to reach FIRE and for us FIRE'd geezers to maintain our FIRE status.


health-care-reform-tax-hikes-on-the-way: Personal Finance News from Yahoo! Finance

I don't see any changes that will threaten my FIRE status personally.

I was disappointed to see the tax code changing so that it will encourage HSA accts less. I never had one, but they seemed like a good way to encourage people to be thoughtful about medical expenditures.

 

[FIREd]

Well, there is some good and some bad for us. The higher Medicare taxes on wages and unearned income will hurt, unless we ESR in 2013 -which we plan to do- because our income will drop below the $250K mark. And, surprisingly, it looks like we might qualify for some healthcare subsidies once we fully retire and our income drops to around $60K.

What's going to hurt us more is the Bush's tax cuts expiring next year. It's hard to say how much of an impact it's going to have on our FIRE plans because I haven't found a calculator which would allow me to run a simulation but, in my estimations, it could be substantial enough to postpone our plans by a year maybe two.

I really don't know how we (and other people impacted) will react to those higher income taxes though. Since high earners prop up close to 35% of the economy, we'll have to see how they change their spending habits. Personally, if the tax increase feels massive, I will cut back on expenses for sure because it will definitely feel like a pay cut. If the tax increase is mild enough to be offset by our annual merit pay increase, I probably won't make any changes to my spending habits.

 

[W2R]

One change listed in this particular article sounds like it could have a bad effect on my quality of life. Or not! Who knows.

10. A new 40% excise tax, beginning in 2018, on high-cost health plans, levied on the portion that exceeds $10,200 for individuals and $27,500 for families.

I carry BCBS Standard, one of the most expensive plans for federal employees and retirees. It does not cost that much now, but its cost has been spiralling upwards, as for most health plans, and who knows what the costs will be in 2018? However, if the costs exceed the stated limits, it might be possible that they will cut back on benefits enough so that the excise tax would be avoided.

That could conceivably be a problem for me as I am getting older. At any rate, I do not relish the prospect of having my health benefits cut back just as I get to an age when I might need them most. But who knows? I have read a number of articles on the effect of the new health laws on BCBS Standard, all of which sound very authoritative until you read the next article which will also sound very authoritative but completely contradictory.

 

[MasterBlaster]

I do not relish the prospect of having my health benefits cut back just as I get to an age when I might need them most

You'd better get used to that thought. Benefits will be cut and costs will go up. Taxes will increase to pay for it all. We will all be poorer.

It is inevitable.

 

[Alan]

I see nothing that would adversely affect us. I no longer have an employer FSA as a retiree but I typically contributed approx $2,000 /year and both DW and I are pretty healthy, $2,500 / year to an FSA seems pretty mean as you have to use up your FSA every year or lose it (unlike an HSA ). That means if you have a major plan-able health event then you can't put enough before tax dollars away to pay for it.

Personal examples from our history are dental work, vision care, elective surgery etc.

 

[Rustic23]

1. no effect
2. no effect
3. no effect
4. no effect
5. no effect
6. no effect
7. no effect
8. no effect
9. no effect
10. no effect
11. no effect
12. no effect
13. no effect

Over 65 on Medicare, income from all sources <$100,000, so I see no effect at all.

 

[freebird5825]

excerpt from the yahoo article
"10. A new 40% excise tax, beginning in 2018, on high-cost health plans, levied on the portion that exceeds $10,200 for individuals and $27,500 for families."

I'm not sure I understand this. I hate to ask the classic dumb question, but here goes...
Does this excise tax mean that the amount of the total of the annual premiums paid greater than $10,200 (for singles) will be taxed at a 40% rate?
In other words, if I pay $15,200 in annual premiums, will I owe Uncle Sam 40% of $5000, or $2000 in extra taxes?
Maybe the [-]stupidity[/-] [-]absurdity[/-] oddity of the concept of this excise tax to penalize people who currently are paying moderate to high premiums for their health plan coverage is what is confusing me.

 

[Alan]

excerpt from the yahoo article
"10. A new 40% excise tax, beginning in 2018, on high-cost health plans, levied on the portion that exceeds $10,200 for individuals and $27,500 for families."

I'm not sure I understand this. I hate to ask the classic dumb question, but here goes...
Does this excise tax mean that the amount of the total of the annual premiums paid greater than $10,200 (for singles) will be taxed at a 40% rate?
In other words, if I pay $15,200 in annual premiums, will I owe Uncle Sam 40% of $5000, or $2000 in extra taxes?
Maybe the [-]stupidity[/-] [-]absurdity[/-] oddity of the concept of this excise tax to penalize people who currently are paying premiums for their health plan coverage is what is confusing me.

I'm sure I'll be corrected but if you are paying the full sum of the premium I don't think you are taxed as well. These expensive health care plans where the employer pays the bulk is the perk that the government is after, making paid for or heavily subsidized health plans taxable like other perks such as company cars.

I pay $80/month for a family plan which is extremely low ($960/year). If the true value is $31k/year then I will be hit with extra taxes as the company is effectively paying me an extra ~$30k/year.

 

[ziggy29]

I assume the W-2 requirement is currently only a *reporting* requirement in case one triggers a "Cadillac" health plan tax starting in 2018. And if the value of your health insurance benefit is less than that, there's no taxable event. We're in an HDHP with a total cost of about $9K a year (we pay a little over $90 a month), so I don't think we'd trip that.

I think increasing the threshold for medical expenses from 7.5% to 10% on Schedule A is one of the worst hikes on the list. My "rich" mother (less than $50K annual income) will get smacked by this one in most years (though not until 2016 for her, apparently). Also the lack of indexing of the "high cost" health plans to inflation has "AMT fiasco" written all over it.

And the new fines for people who don't buy health insurance aren't *nearly* strong enough to prevent adverse selection.

 

[ERD50]

9. A hike in the 7.5% floor on itemized deductions for medical expenses to 10%, beginning in 2013. But taxpayers age 65 and over are exempt from the cutback through 2016.

Got me.

I thought it was supposed to be good to be insured? Why are they penalizing me (relative to what it was before this 'reform') for paying for my insurance?

This could hit me to the tune of ~ $300 per year. And my benefits so far are.....?

-ERD50

 

[dandetour]

Does anyone know more details on #8? I have seen it twice now, and the
wording makes my head hurt.

8. Starting in 2013, a 0.9% Medicare surtax will apply to wages in excess of $200,000 for single taxpayers and over $250,000 for married couples. Also, for the first time ever, a Medicare tax will apply to investment income of high earners. The 3.8% levy will hit the lesser of (1) their unearned income or (2) the amount by which their adjusted gross income exceeds the $200,000 or $250,000 threshold amounts. The new law defines unearned income as interest, dividends, capital gains, annuities, royalties, and rents. Tax-exempt interest won't be included, nor will income from retirement accounts.

Take for example a pension in the under $100k range. Is that now not unearned income?
Is it taxed at 3.8% or not?
And if not is it because it is below $200k or because pension is not listed as something the new law defines as unearned income?

Thanks,
Dan

 

[Rustic23]

Dandetour,
I had not thought of this when I posted 'no effect', however, none of these numbers are indexed. So like you a $100k of pension income, if taxed as unearned income, it will be taxable in 10 years or so.

 

[MasterBlaster]

Take for example a pension in the under $100k range. Is that now not unearned income?
Is it taxed at 3.8% or not?
And if not is it because it is below $200k or because pension is not listed as something the new law defines as unearned income?

Clearly the $100k pension is under $100k - so that flag doesn't trigger the tax.

However a pension is (usually) an annuity. If you have enough income so that the total is above the $200/$250k threshold, then the income over the thresholds would get the medicare tax.

That's how I read it.

 

[dandetour]

I wish I were as optimistic. The part that I am focusing on is:
"The 3.8% levy will hit the lesser of (1) their unearned income"

It sounds like the $200k or $250k trigger is AGI based, and this new definition of unearned income is not.

Perhaps the reporter that created this list of 13 did a poor job of wording #8, or perhaps we will be caught up in the intended unintended consequences politicians love to create.
"Oh, did we forget to index again? Silly us."

Dan

 

[smjsl]

5. Doubling the penalty for nonqualified distributions from health savings accounts, to 20%, beginning in 2011.

7. A ban on using funds from flexible spending accounts, health reimbursement arrangements or health savings accounts for the cost of over-the-counter medications, starting in 2011.

I find these interesting because they effectively change the "contract", if there was one, for the users of HSA+HDHP, unless it has provisions that new penalties and conditions only apply to amounts attributable to HSA contributions after 2011. If they can worsen these parts of the contract, I am guessing they can worsen other parts too. E.g. instead of 0% tax for (some or even all) medical withdrawals, they could make it a "low" 5% tax; then maybe 10%, etc.

This could hit me to the tune of ~ $300 per year. And my benefits so far are.....?

I don't recall (nor did I study) all the benefits, but a big one that I remember mentioned is closing up of that ridiculous doughnut hole in Medicare drug coverage... Also, *if* overall cost of insurance will be low, you might be happy to pay $300/year in this category while paying say $1000 less for the cost of health coverage (obviously a number pulled out of thin air but you see the point..)

 

[ERD50]

I don't recall (nor did I study) all the benefits, but a big one that I remember mentioned is closing up of that ridiculous doughnut hole in Medicare drug coverage... Also, *if* overall cost of insurance will be low, you might be happy to pay $300/year in this category while paying say $1000 less for the cost of health coverage (obviously a number pulled out of thin air but you see the point..)

Yes, but I'm ~ 10 years away from Medicare, no telling what the rules are by then. We will see, might be some bright spots, but for me personally, it would seem that ins cos are going to have to raise rates to cover some of these mandates.

-ERD50

 

[Steve O]

Well hopefully it will all be repealed in Nov...

As far as them trying to take it out of my tax refund if I decide it will be cheaper to just buy insurance after I get sick...

I owe every year anyway...

I pray that it's rulled unconstitutional...

None of it according to that article will affect me though unless I decide to not buy insurance...

What is gonna be the train wreck is all of the debt...

Were all gonna pay for that eventually one way or the other...

 

[Running_Man]

excerpt from the yahoo article
"10. A new 40% excise tax, beginning in 2018, on high-cost health plans, levied on the portion that exceeds $10,200 for individuals and $27,500 for families."

I'm not sure I understand this. I hate to ask the classic dumb question, but here goes...
Does this excise tax mean that the amount of the total of the annual premiums paid greater than $10,200 (for singles) will be taxed at a 40% rate?
In other words, if I pay $15,200 in annual premiums, will I owe Uncle Sam 40% of $5000, or $2000 in extra taxes?
Maybe the [-]stupidity[/-] [-]absurdity[/-] oddity of the concept of this excise tax to penalize people who currently are paying moderate to high premiums for their health plan coverage is what is confusing me.

I believe the way this works is as a tax that will be charged to the insurer So if it's cost is $15,200 there will be an additional charge to the insurance plan of 40% of $5,200, which I assume they will charge you which means there will be an additional tax of 40% on the $2,080 so that in the end there will be an insurance bill for $18,667 since the 40% of the $8,667 will get you to the $15,200 the insurance actually cost and the tax will be $3,467 (40% of the 8,667 over $10,000 charged to you but ends up being a 66% tax on the $5,200, unless of course the insurance company decideds not to charge you.

I also believe any co-pays and payments from the individual are included in the total cost of the plan to develop this tax. Also note what inflation will do in the coming years to make virtually all plans "cadillac" plans and therefore tax them out of existence or make everyone just have very basic health care which is more affordable for the government

 

[scrabbler1]

"9. A hike in the 7.5% floor on itemized deductions for medical expenses to 10%, beginning in 2013. But taxpayers age 65 and over are exempt from the cutback through 2016."

This one makes no sense to me because those covered under group health plans by their employer have 100% of their HI premiums tax-deductible (i.e. use pretax dollars), while those of us like me in the more expensive individual market will now see less of those premiums tax-deductible. I would be okay with this change if HI premiums could be separated from the rest of the med expenses and not be subject to any income threshold (other than an overall itemized deduction limitation).

That being said.....

"12. Providing a refundable tax credit, once the individual mandate takes effect in 2014, to help low-income folks purchase coverage. To be eligible, a person's household income must be between 100% and 400% of the federal poverty level, generally around $11,000 to $44,000 for singles and $22,000 to $88,000 for families."

This one will help me as an ER because some of those soon-to-be lesser-deductible HI premiums will become subsidized instead. My ER income is in the low $30Ks now so by 2014 it should remain within the range (singles) eligible for a subsidy.

Which will be more, the subsidy or the tax increase due to the lesser amount of deductible HI premiums? I don't know, but I don't see it being a large amount in either direction.

 

[kaneohe]

Does anyone know more details on #8? I have seen it twice now, and the
wording makes my head hurt.

8. Starting in 2013, a 0.9% Medicare surtax will apply to wages in excess of $200,000 for single taxpayers and over $250,000 for married couples. Also, for the first time ever, a Medicare tax will apply to investment income of high earners. The 3.8% levy will hit the lesser of (1) their unearned income or (2) the amount by which their adjusted gross income exceeds the $200,000 or $250,000 threshold amounts. The new law defines unearned income as interest, dividends, capital gains, annuities, royalties, and rents. Tax-exempt interest won't be included, nor will income from retirement accounts.

Take for example a pension in the under $100k range. Is that now not unearned income?
Is it taxed at 3.8% or not?
And if not is it because it is below $200k or because pension is not listed as something the new law defines as unearned income?

Thanks,
Dan

Not sure I see your problem here. I interpret this the same as MasterBlaster. Suppose you have pension of 100K and it is considered unearned income. If you have no other income, you haven't triggered the high income trip level of 200/250K
so your unearned income woudn't be taxed.

If you do have other income for a total of 201K (say you are single), and your unearned income was 201K, you exceeded the 200K threshold by 1K and the lesser of the 2 numbers is 1K so you are taxed 3.8% on 1K (not 3.8% of 201K).

 

[dandetour]

Thanks fellows. For taking the time to type enough words that it finally
hit me and I think I understand.
Dan

 

[deserat]

Well, what this thread has taught me is that there can be many different interpretations on what those proposed tax levies mean as well as how they are levied. What I also find interesting is seeing how one modifies their behavior based on those tax levies.....they are magic lines that most will try to stay under....however, in the end, someone needs to be above the line in order for this 'benefit' or 'entitlement' to be paid for. I find it amazing that some people think that penalizing income generation versus incentivizing it will result in more resources on the penalizer's side. What's scary, though, is the lack of 'indexing' like that of the AMT which will smack quite a few more people with an anvil several years down the road. Although the cynic in me wonders if that was done on purpose....

 

[saluki9]

I find these interesting because they effectively change the "contract", if there was one, for the users of HSA+HDHP, unless it has provisions that new penalties and conditions only apply to amounts attributable to HSA contributions after 2011. If they can worsen these parts of the contract, I am guessing they can worsen other parts too. E.g. instead of 0% tax for (some or even all) medical withdrawals, they could make it a "low" 5% tax; then maybe 10%, etc.

Keep this in mind all you Roth IRA holders. The govt isn't afraid to change the rules of the game after it has started.

 

[ziggy29]

Keep this in mind all you Roth IRA holders. The govt isn't afraid to change the rules of the game after it has started.

That is a concern. Then again, this is nothing new; when they started taxing SS benefits (even as money paid to SS was already taxed) this clearly demonstrated the concept.

I know the ban on "ex post facto" laws refers to criminal issues, but it would be nice if legislation was also held to this standard. When you make a long-term commitment based on the tax laws, it's not cool to change the "deal" on the funds you've already committed. At the very least when they change the deal you should be able to yank the money out without penalty. Even cell phone contracts give you an "out" when they change the terms in a way you don't approve of.

 

[meierlde]

What's going to hurt us more is the Bush's tax cuts expiring next year. It's hard to say how much of an impact it's going to have on our FIRE plans because I haven't found a calculator which would allow me to run a simulation but, in my estimations, it could be substantial enough to postpone our plans by a year maybe two.

Actually you can get close if you take your Taxable income, and then go to the tax rate schedule and add 5% to the 28 33 and 35%(4.5 here) brackets and calculate, i.e.
find the bracket you are in, then calcuate the base by taking the base of the 28% and subtract it from Taxable Income, or to the max of 28% which ever, multiply by 33% then add the base amount for the 28% bracket, repeat as necessary. Excel makes it quite easy.