Panorama July 2012 VOLUME 1, ISSUE 4 The Affordable Care Act is Constitutional On June 28, 2012, the United States Supreme Court issued its long-awaited de- In this Issue: cision on the constitutionality of the Patient Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education ReconciliationThe Affordable Care Act is Act (HCERA). In a nutshell, the nation’s highest court upheld the law – exceptConstitutional for certain Medicaid provisions. The 5 to 4 decision preserves many far- reaching tax provisions and health insurance reforms. In coming months, law-Charitable Gift Annuities makers and legal scholars will examine all of the nuances of the Court’s highlyCan Provide Retirement complex decision. More immediately, individuals and businesses are concernedIncome about what steps they need to take next.Start Thinking About 2012 Individual MandateYearend Capital GainsPlanning Now The PPACA includes a shared responsibility requirement for individuals. This has come to be known as the individual mandate. Broadly, this provision re- quires individuals to obtain minimum essential health coverage or pay a penalty starting in 2014. Many individuals, however, are exempt from the pen- alty. These include individuals covered by Medicare and Medicaid, individuals with coverage under military health plans, undocumented individuals, and oth- ers. The PPACA also imposes no penalty on individuals who cannot afford coverage. Additionally, individuals with employer-provided coverage generally are treated as having minimum essential coverage and are exempt from the pen- alty unless the coverage is deemed unaffordable. In National Federation of Independent Business et al. v. Sebelius, June 28, 2012, Chief Justice Roberts and Justices Ginsburg, Breyer, Sotomayor, and Ka- gan found that the individual mandate was a valid exercise of Congress’ taxing
Story continued from front ... 8. Excise tax on certain medical devices The Affordable Care Act … 9. Indoor tanning excise tax 10. Tax credit for therapeutic discovery projectspower under the Constitution. “Under the mandate, 11. Disclosure of cost of employer-provided coverageif an individual does not maintain health insurance, on Forms W-2 for informational purposesthe only consequence is that he must make an addi- 12. Limits on use of health FSA dollars on over-the-tional payment to the IRS when he pays his taxes. counter medicationsThat, according to the Government, means the man- 13. Enhanced simple cafeteria plan rules for smalldate can be regarded as establishing a condition— businessesnot owning health insurance—that triggers a tax— 14. Changes to retiree prescription drug subsidiesthe required payment to the IRS. Under that theory, 15. Codification of the economic substance doctrinethe mandate is not a legal command to buy insur- 16. Branded prescription drug feesance. Rather, it makes going without insurance just 17. Reforms for charitable hospitalsanother thing the Government taxes, like buying 18. Reporting requirements for sponsors of healthgasoline or earning income.” care coverageThe majority concluded: “Our precedent demon- The PPACA also imposes a penalty on applicable em-strates that Congress had the power to impose the ployers (generally employers with more than 50 full-exaction in Section 5000A under the taxing power, time employees) that do not provide affordable healthand that Section 5000A need not be read to do more insurance coverage to their employees. The penalty isthan impose a tax. That is sufficient to sustain it.” scheduled to take effect after 2013. Employers need to review their coverage to determine if it satisfies theJustices Scalia, Kennedy, Thomas, and Alito dis- minimum essential coverage and affordability require-sented. According to the dissenting justices, the ma- ments under the PPACA. Employers also should re-jority’s decision that the individual mandate imposes view their benefits packages for compliance with thea tax in essence was a rewrite of the PPACA and not PPACA.an interpretation. The dissenting justices would havestruck down the entire law. Since passage of the PPACA/HCERA, the IRS and the U.S. Departments of Health and Human ServicesTax Provisions (HHS) and Labor (DOL) have issued extensive guid- ance on the new law. The pace of guidance is expectedAlong with the individual mandate, the PPACA in- to accelerate now that the law has been upheld by thecludes many tax provisions, which remain law. It Supreme Court. cannot be over-emphasized that the tax provisionsimpact nearly every individual and business. PerspectiveHere’s a summary of some of the tax-related provi- Strengthsions: 1. Code Sec. 45R small employer health insurance tax credit Insurance Reforms 2. Additional Medicare tax for higher income indi- viduals Along with the tax-related provisions we have dis- 3. Medicare tax on investment income cussed, the PPACA has set in motion many insurance 4. Contribution limits on health flexible spending reforms. They include: arrangements (health FSAs) 5. Increased itemized medical expense deduction 1. Enhanced coverage for certain dependents threshold 2. Summary of benefits coverage and uniform glos- 6. Excise tax on high-dollar health insurance plans sary 7. Additional tax on distributions from health sav- 3. New rules for internal and external reviews of ings accounts (HSAs) and certain other arrange- adverse decisions by health insurance carriers ments 4. Patient’s bill of rights
Insurance Reforms (cont) ... Integrity 5. New rules for preventive servicesLike the tax provisions, federal agencies have been Innovationbusy issuing guidance on the insurance reforms.More guidance is expected in coming weeks andmonths. CharacterHealth Insurance Exchanges CharitableGift Annuities Can ProvideThe PPACA requires every state to establish an Retirement IncomeAmerican Health Benefit Exchange and Small Busi-ness Health Options Program (SHOP Exchange) to A charitable gift annuity is a contract between a donorprovide qualified individuals and qualified small and a qualified charity, whereby the donor irrevocablybusiness employers access to qualified health transfers cash or property to the charity in exchange forplans. Some states have already begun the process of a partial tax deduction and a lifetime stream of annualsetting up exchanges. Other states waited to see the income from the charity. When the donor dies, the char-outcome of the Supreme Court case. ity keeps the remainder of the original gift. A portion of the payments are considered to be a partial tax-free re-Medicaid turn of the donors gift, which are spread in equal pay- ments over the life expectancy of the annuitant.The PPACA also expanded Medicaid to cover moreindividuals with incomes below 133 percent of the The amount of the income stream is determined byfederal poverty level. The federal government would many factors including the donors age and the policy ofcover 100 percent of the Medicaid costs of the newly the charity. Most charities use payout rates defined byeligible individuals, with the percentage dropping to the American Council on Gift Annuities.90 percent (with states covering the difference) by2020. States would be required to make up the differ- Let’s use an example to show how this works. Assumeence. The PPACA also set minimum essential levels John Smith, age 70, has $100,000 in cash at his bankof Medicaid coverage and made other changes. States earning 0.25% annually. John also has a need for retire-that fail to comply with the PPACA risk termination ment income and has a desire to benefit his church, aof all Medicaid funding from the federal government. qualified charitable organization, at his death. John en- ters into a charitable gift annuity contract with hisThe Supreme Court held that Congress could expand church whereby he gives them the $100,000 today.Medicaid. However, Congress could not penalizestates that choose not to participate in the expansion What does John get? He gets a charitable income taxby taking away their Medicaid funding. deduction for a portion of his $100,000 donation in the year of gift, and he receives an annual payment from hisLooking Ahead church in the amount of $5,100, each year for the rest of his life. Compare this to the $250 in annual interest thatEmployers, taxpayers – indeed everyone – must pre- the account generated at the bank. A portion of each an-pare for sweeping changes in health care in coming nuity payment is taxable to John each year.years. Many of the provisions in the PPACA havealready been implemented or are in the process of The annuity rate used by John’s church is based onbeing implemented. Other provisions are scheduled to John’s age and the current suggested annuity rate tablestake effect after 2012. The Supreme Court’s uphold- provided by the American Council for Gift Annuities.ing of the PPACA clears the way for implementation Given the pathetic yields of the current markets, thisof the new law (unless a future Congress votes to re- strategy could be a nice fit for individuals with the rightpeal the law). facts and circumstances.
Start Thinking About 2012 Yearend less, dispose of it with a view of maximizing its remain- ing economic value, which could disappear altogetherCapital Gains Planning Now while you are spending time fashioning your tax plan- ning strategy. We discussed in the first quarter 2012 Panoramanewsletter the expected change in rates on capital Given the complexities and myriad possibilities onegains when the Bush Tax Cuts expire at the end of could face and the personal nature of decisions like2012. As a reminder, the 2012 long-term capital these, we would recommend that you not wait until thegains rate is 15% and 35% for short-term capital end of the year as most are inclined to do to address thisgains. Beginning January 1, 2013, the long-term capi- subject. Gather your current realized and unrealizedtal gains rate increases to 20% and the short-term gains and losses for the year to date, and schedule ancapital gains increases to 39.6%. Unfortunately, you appointment with your income tax advisor. It will likelyalso have to add onto each base rate another 1.2% to be worth the effort.reflect the return of the 3% disallowance of itemizeddeductions and an additional 3.8% on investment in-come, including capital gains, for incomes above cer-tain thresholds for the new Medicare tax. I’ll stopthere, it could get even worse if President Obama’s“Buffett Rule” is passed, which could impose a mini-mum tax rate of 30% on realized long-term capitalgains on millionaires. IntegrityTraditional year end capital gains tax planning con-templates accelerating losses into the current year Innovation(referred to as “tax loss harvesting”) and deferring therecognition of gains into next year. Further, wherecapital loss carryovers exist, taxpayers are generally Characterinclined to use them as soon as possible to get themost “time value” tax benefit.Capital gains tax planning for 2012 requires counter-intuitive thinking. Taxpayers should review their un-realized gain positions on their capital assets and seri-ously consider recognizing (selling) those gains in2012 to get the benefit of the lower rates. Con-versely, capital losses become more valuable in 2013when rates increase. So, a viable strategy may be topostpone recognizing capital losses, or capital losscarryovers until 2013 to shelter higher tax rates.Keep in mind that even in 2012, the short-term capi-tal gains rates are still 35%. So, there is nothingwrong with “harvesting” capital losses or using capi-tal loss carryovers to offset realized short-term capitalgains in 2012.A word of caution, don’t let common sense get lost inthis convoluted process of tax planning. If you hold astock that is in serious jeopardy of becoming worth-
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