Source: http://www.journalofaccountancy.com/news/2010/mar/20102740.html?WBCMODE=PresentationUnpublished
Timestamp: 2016-02-13 00:27:15
Document Index: 151331149

Matched Legal Cases: ['§ 5000', '§ 105', '§ 4980', '§ 1411', '§ 7701', '§ 6662', '§ 6664']

Tax Provisions in the Health Reconciliation Act
Thursday, Congress passed the Health Care and Education
Reconciliation Act of 2010 (HR 4872). The bill now goes to the
president for his signature. The Reconciliation Act amends various
Affordable Care Act (PL 111-148), the large health care reform act
that was enacted on Tuesday. The Reconciliation Act also adds some
new provisions that were not included in the Patient Protection Act.
Assistance Credit The
Patient Protection Act created refundable tax credits for eligible
taxpayers to use to help cover the cost of health insurance premiums
for individuals and families who purchase health insurance through a
state health benefit exchange (which each state is required to
establish). The
Reconciliation Act slightly changes the amount of the credit, which
equals the amount by which the taxpayer's premiums exceed a
specified threshold. That threshold ranges from 2% of income for
those at 100% of the federal poverty level for the family size
involved to 9.5% of income for those at 400% of the federal poverty
level for the family size involved.
The Reconciliation Act also provides for an inflation
adjustment in the starting and ending percentages for years after
2014. The adjustment will be based on the rate of premium growth for
the preceding calendar year over that year’s rate of income growth.
2018, the inflation adjustment will be based on the rate of premium
growth for the preceding calendar year over that year’s consumer
price index growth, but only if the aggregate amount of premium
assistance tax credits and cost-sharing reductions under section
1402 of the Patient Protection Act for the preceding calendar year
exceeds an amount equal to 0.504% of the gross domestic product for
Tax on Uninsured Individuals
IRC § 5000A (created by the Patient Protection Act) is amended to
change the amount of the penalty for U.S. citizens and legal
residents who fail to maintain minimum amounts of health insurance
coverage. Under the Reconciliation Act, individuals who fail to
maintain minimum essential coverage will be subject to a penalty
equal to the greater of: (1) 2.5% of household income in excess of
the taxpayer’s household income for the tax year over the threshold
amount of income required for income tax return filing under section
6012(a)(1); or (2) $695 per uninsured adult in the household. (Under
the first act, the amount of the penalty was $750.) The penalty will
be phased in from 2014–2016. For 2014, the penalty will be the
greater of 1% of household income over the filing threshold or $95;
for 2015, it will be the greater 2% of household income over the
filing threshold or $325; and for 2016 it will be the full 2.5% or
$695 amount.
Reconciliation Act changes the definition of “dependent” for
purposes of IRC § 105(b) (excluding from income amounts received
under a health insurance plan) to include amounts expended for the
medical care of any child of the taxpayer who has not yet reached
age 27. The same change is made in section 162(l)(1) for purposes of
the self-employed health insurance deduction, in section 501(c)(9)
for purposes of benefits provided to members of a VEBA, and in
section 401(h) for benefits for retirees. Excise
Tax on High Cost Employer-Sponsored Coverage
IRC § 4980I (enacted by the Patient Protection Act) imposes a tax
equal to 40% of any “excess benefit” associated with
employer-sponsored health coverage. “Excess benefit” means the
amount by which the aggregate cost of the coverage exceeds an annual
limitation specified in the act. The Reconciliation Act pushes back
the effective date of this provision, increases the annual
limitation and eliminates a phase-in rule for the 17 states with the
highest coverage costs. Under
the Reconciliation Act, for 2018, the annual limitation is $10,200
for self-only coverage or $27,500 for all other coverage. Retirees
and employees in certain high-risk professions or who repair or
install electrical or telecommunications lines have a higher limit.
After 2018, the annual limitation is adjusted for inflation. This
provision is effective for tax years beginning after Dec. 31, 2017.
Reconciliation Act added a new IRC § 1411 that imposes a tax on
individuals equal to 3.8% of the lesser of the individual’s net
investment income for the year or the amount the individual’s
modified adjusted gross income exceeds a threshold amount. For
estates and trusts, the tax equals 3.8% of the lesser of
undistributed net investment income or adjusted gross income over
the dollar amount at which the highest trust and estate tax bracket
begins. For
married individuals filing a joint return and surviving spouses, the
threshold amount is $250,000; for married taxpayers filing
separately, it is $125,000; and for other individuals it is $200,000.
investment income is defined as income from interest, dividends,
annuities, royalties and rents, other than such income derived in
the ordinary course of a trade or business (however, income from
passive activities and from a trade or business of trading in
financial instruments or commodities is included in the definition
of net investment income).
provision applies to tax years beginning after Dec. 31, 2012.
Reconciliation Act codifies the economic substance doctrine in new
IRC § 7701(o). The provision says that a transaction will be treated
as having economic substance only if the transaction changes the
taxpayer’s position in a meaningful way (apart from the tax
benefits) and the taxpayer has a substantial purpose
(apart from the tax benefits) for entering into the transaction. The
economic substance doctrine was created by the courts, and while
they agree about the general definition and purpose, courts have
applied different tests in determining whether a transaction has
economic substance. The act codifies a two-part test and requires
transactions to meet both prongs of the test.
Reconciliation Act puts failure to meet the economic substance test
within the list of transactions that are subject to penalty under
IRC § 6662 and imposes an increased penalty amount for nondisclosed
transactions that lack economic substance. The act also removes
transactions that lack economic substance from the reasonable cause
exception in IRC § 6664.