The House of Representatives is scheduled to vote today on the American Health Care Act (the “AHCA”), the GOP-proposed replacement to Obamacare. In advance of the vote, on March 20, 2017, the House Rules Committee released amendments to the AHCA designed to widen its support among House Republicans. The amendments would tighten new rules for Medicaid eligibility, accelerate the repeal of most ACA-related taxes, and allow the Senate to consider changes to the structure of the new tax credits for older individuals.
The following are the highlights of the tax-related provisions of the amendments:
Net Investment Income Tax
The net investment income tax (“NIIT”) generally imposes a 3.8 percent surtax on the investment income (i.e., interest, dividends, capital gains, etc.) of married taxpayers whose modified adjusted gross income for the tax year exceeds $250,000 ($200,000 for single taxpayers). The amendments would accelerate the repeal of the NIIT from 2018 to 2017.
Additional Medicare Tax
The additional Medicare tax requires individuals to pay an additional .9% Medicare tax on wages and self-employment income in excess of $250,000 for married taxpayers ($200,000 for single taxpayers). The amendments would accelerate the repeal of the additional Medicare tax from 2018 to 2017.
The ACA had introduced a 40% excise tax on employer-sponsored health insurance plans (known as “Cadillac” plans) whose cost exceeds certain thresholds. This tax had been scheduled to apply to tax years beginning after December 21, 2017. The amendments would further delay the implementation of this tax by 1 year, from 2025 to 2026.
Medical Expense-Related Provisions
Medical Expense Deduction
The ACA increased the threshold for individuals under the age of 65 to claim an itemized deduction for unreimbursed medical expenses from 7.5% of adjusted gross income (“AGI”) to 10% of AGI. The amendments would reduce the AGI threshold from the 7.5% threshold found in pre-ACA law to a 5.8% AGI threshold. The 5.8% AGI threshold would be effective starting in 2017.
Health Flexible Spending Arrangements
Under the ACA, contributions to health flexible spending accounts (“FSAs”) was limited to $2,500 (adjusted for inflation). The amendments would accelerate the repeal of this limitation from 2018 to 2017.
The ACA restricted reimbursements for medicines and drugs to prescribed drugs. The amendments would permit reimbursements for over-the-counter medicines starting in 2017 (1 year earlier than originally proposed by the AHCA).
Health Savings Accounts
Under current law, the maximum amount that may be contributed to a Health Savings Account (“HSA”) in 2017 is $3,400 for individuals and $6,750 for families. The AHCA would increase this limit to cover the maximum annual deductible and out-of-pocket expenses permitted under a high deductible plan, resulting in projected maximum contributions of at least $6,550 for self-only coverage and $13,100 for family coverage. The amendments would accelerate the implementation of these increased limits from 2018 to 2017.
New Refundable Credit for Health Insurance Coverage
The AHCA would repeal the premium assistance tax credit (currently available to certain taxpayers who purchase health insurance through the exchange) and replace it with an advanceable, refundable tax credit for eligible individuals to purchase state-approved, major medical health insurance and unsubsidized COBRA coverage. Eligible individuals must not have access to government health insurance programs or an offer of health insurance from any employer.
The credits would be adjusted by age, as follows:
The total credit would be capped at $14,000 per family. The credits are available in full for married taxpayers making less than $150,000 ($75,000 for single taxpayers) and phase out by $100 for every additional $1,000 of income.
Although the amendments do not propose changes to the amounts of the credits contained in the initial legislation, one of the key motivations for passing these amendments is that the amendments would give Senate the ability to make changes to the tax credit structure, particularly for older individuals. The amendments also appear to eliminate the ability to use the credits to pay for unsubsidized COBRA premiums.
The accelerated repeal of the ACA taxes – generally from 2018 to 2017 - could significantly reduce 2017 tax liabilities, particularly those of taxpayers whose income exceeds the $250,000 (married) and $200,000 (single) thresholds. In particular, the accelerated repeal of the 3.8% net investment income tax generally would reduce the top federal capital gains tax rate on gains realized in 2017 from 23.8% to 20% (a 16% decrease). If you would like to discuss the potential impact of the AHCA on your personal tax situation, please contact Natalie Takacs at (216) 928-5403 or a member of your engagement team.