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Tax Quote of the Week
"Taxing is an easy business. Any projector can contrive new impositions;
any bungler can add to the old; but is it altogether wise to have no other
bounds to your impositions than the patience of those who are to bear
them?"
– Edmund Burke
Healthcare Bills Pass
On March 23, 2010, President Obama signed the Patient Protection and
Affordable Care Act (H.R. 3590). The Act had initially passed the Senate in
December and was passed by the House on March 21. President Obama stated,
"While the Senate still has the last round of improvements to make on
this historic legislation – and these are improvements I'm confident they
will make swiftly – the bill I'm signing will set in motion reforms that
generations of Americans have fought for, and marched for, and hungered to
see."
The President was referring to a companion bill that was submitted to the
Senate with the title Healthcare and Education Reconciliation Act of 2010
(H.R. 4872). The companion bill included a number of changes that the House
members demanded prior to passing the Senate bill.
The reconciliation bill passed the Senate by a vote of 56-43 and also
passed the House later on March 25, 2010 by a vote of 220-207.
The compromise reconciliation bill included five major healthcare bill
modifications:
1. Closing the Medicare prescription drug "donut hole" – Seniors
will be covered by 2020. In addition, there is a $250 rebate for seniors
who currently spend more than $2,830 on prescription drugs.
2. The "Cadillac" Tax – A 40% excise tax on insurance plans with
value over $10,200 for an individual or $27,500 for a family will be
applicable in 2018.
3. New Medicare Tax on Investment Income – A 3.8% tax will apply in 2013
for single persons with incomes over $200,000 and married couples over
$250,000 in income.
4. Individual No-Insurance Fine – The fine for individuals with no medical
insurance is reduced from $750 to $695 per year.
5. Large Company No-Insurance Fine – For a large company that does not
provide healthcare insurance to employees, the fine is increased from $750
to $2,000 per employee.
Editor's Note: Your editor and this organization take no position
with respect to these specific provisions or the comments on healthcare
below. This information is offered as a service to our readers.
Praise and Concerns on Healthcare Bills
Following the passage of major healthcare legislation, leaders of both
parties responded with both praise and expressions of concern. As most
observers expected, the praise was largely from the Democratic side and the
concerns were primarily from the Republican side.
Senate Finance Chair Max Baucus (D-MT) had labored diligently for several
years to pass healthcare. He praised the final legislation and stated,
"Too many families and small businesses in Montana and across America
have struggled with the instability created by our broken healthcare
system. Today's passage of health reform means Americans will not have to
wait any longer for meaningful health reform that will end insurance
company abuses, lower costs and increase choice and competition for
consumers." Sen. Baucus believes that the bill will reduce insurance
company abuses and promote increased choices and competition.
Sen. Kent Conrad (D-ND) is Chair of the Senate Budget Committee. He
indicated, "It ends insurance abuses. Insurers will no longer be able
to deny coverage for you or your children because of pre-existing
conditions or raise premiums when you get sick. It provides tax breaks for
small businesses. Small businesses will get tax credits to help buy
coverage for their workers."
Sen. John Kyl (R-AZ) expressed concern about the taxes in the new bill. He
observed, "It taxes many of those who have health insurance. It taxes
you if you don't have health insurance. The taxes in the bills hit
families, it hits seniors, it hits the chronically ill, small businesses,
those who have flexible spending accounts and those who use medical
devices. All of those things create a tax that you pay."
Sen. Charles Grassley (R-IA) has advocated greater oversight of medical
centers. He negotiated provisions that he believes will encourage medical
centers to provide greater levels of charity care.
Sen. Grassley published a press release that stated, "The bill
requires that a hospital complete a community needs assessment once every
three years and adopt and publicize a financial assistance policy;
prohibits billing those who qualify for financial assistance at the top
rates; and prohibits a hospital from taking extraordinary collection
actions if a hospital has not made reasonable efforts to notify patients of
its financial assistance policy. The bill also requires the IRS to review
the tax-exempt status of each hospital every three years; requires Treasury
and Health and Human services to submit an annual report to Congress on the
level of charity care, bad debt expenses and the unreimbursed costs of
means-tested and non-means-tested government programs."
The National Federation of Independent Businesses (NFIB) also expressed
concern about the new taxes. Senior Vice President of NFIB Susan Eckerly
noted, "This is a tax bill wrapped up in healthcare paper. It will
raise, not lower, insurance costs and it will increase both taxes and the
cost of doing business for the very people they said they wanted to help –
small business."
Healthcare Revenue Provisions
As the actual language was disclosed in the 2,733 page healthcare bill and
150 page reconciliation bill, a clearer picture of the actual revenue
provisions within the bill emerged. There are six major revenue provisions
that will have widespread impact. These include the following:
1. Medicare Tax Increase
The Medicare tax increase will apply for single persons with incomes over
$200,000 and married couples with income over $250,000. The regular
Medicare tax is 1.45% on the employee and 1.45% on the employer, for a
total of 2.9%. Upper income individuals will face an added 0.9% hospital
insurance tax, raising the total Medicare rate at those levels to 3.8%. The
additional tax will be on the employee and not on the employer.
The increased Medicare tax will be effective starting in 2013. If the upper
income rate is increased from 35% to 39.6% in 2011, the top marginal
federal tax rate (income tax plus Medicare tax) for high-income persons in
2013 will be 43.4%. State and local taxes will be added to this number.
2. Medicare Tax on Unearned Income
Starting in 2013, the 3.8% tax for single persons with incomes over
$200,000 and married couples with income over $250,000 will apply to
unearned income. This is defined as interest, dividends, capital gains,
annuities, royalties, rents and other types of passive income. The
reconciliation bill did exclude qualified retirement plan distributions.
Therefore, distributions from a 401(k), 403(b) or other qualified
retirement plan will be excluded from this 3.8% tax. Pure charitable trusts
with only charitable interests are also excluded.
If the capital gain rate increases to 20% in 2011, then by 2013 the federal
tax rate (capital gains and Medicare) for substantial sales of property
will be 23.8%.
3. Cadillac Plan 40% Excise Tax
As part of the negotiation process during the development of the healthcare
bills, the Senate decided to tax "Cadillac" or expensive
healthcare plans. Under the reconciliation compromise, the 40% excise will
be paid by the insurer and it will apply if the total medical coverage for
a single person is over $10,200 or $27,500 for a married couple. The
reconciliation bill excludes dental and vision benefits from the plan.
There is also an increase of $1,350 for individual coverage and $3,000 for
family coverage for certain high-risk professions. The excise tax will
apply in 2018 and later years.
4. Health Insurers Fee
There will be a new fee on large health insurers based upon their market
share. The fee is scheduled to raise $101 billion over 10 years. It is
expected that the fee will lead to higher insurance premiums.
5. Fee on Pharmaceutical Manufacturers
A new fee of $23 billion over 10 years will apply to pharmaceutical
manufacturers. There are various exclusions for most federal programs in
the determination of market share and the applicable fee. However, drugs
sold to the general public will subject the pharmaceutical manufacturers to
the new fee. It is expected that drug prices will increase to reflect the
new fee.
6. Medical Device Fee
There is a new 2.3% tax on medical devices sold in year 2013 and later
years. The tax will not apply to eyeglasses, contact lenses and hearing
aids. This tax will increase the cost of medical devices to consumers by
2.3%.
Applicable Federal Rate of 3.2% for April – Rev. Rul. 2010-11; 2010-14
IRB 1 (18 Mar. 2010)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2010.
The AFR under Sec. 7520 for the month of April will be 3.2%. The rates for
March of 3.2% or February of 3.4% also may be used. The highest AFR is beneficial
for charitable deductions of remainder interests. The lowest AFR is best
for lead trusts and life estate reserved agreements. With a gift annuity,
if the annuitant desires greater tax-free payments the lowest AFR is
preferable. During 2010, pooled income funds in existence less than three
tax years must use a 4.6% deemed rate of return. Federal rates are
available by clicking
here.
Grantor created a revocable living trust that became
irrevocable upon his death. Under the terms of the trust, any assets
remaining after satisfying other listed distributions are to be distributed
to a charitable organization named by Grantor. The terms also directed the
trustee to incorporate a private foundation (Foundation) under Secs.
501(c)(3) and 2055(a). Following Grantor's death, the trust made
tax-deductible contributions to Foundation. Sec. 642(c) allows an estate or
trust to take a deduction for gifts made in the previous tax year, provided
the return is timely filed. The accountant for trust filed the required tax
returns late and, therefore, could not make a Sec. 642(c) election. Trustee
requested a letter ruling authorizing an extension of time to file the
proper return and claim the charitable deduction permitted by Sec. 642(c).
Sec. 301.9100-1(c) provides that the Commissioner may grant a request for a
reasonable extension. A request for relief will be granted when there is
evidence that (1) the taxpayer acted reasonably and in good faith, and (2)
granting relief will not prejudice the interests of the government. The
Service determined that the trustee acted in good faith and that granting
an extension would not prejudice the government. Therefore, the extension
to make the Sec. 642(c) election was granted.
Ms. Ella Kelly was a fortunate and very healthy annuitant.
When she was age 92, she purchased a gift annuity paying 14% from a private
university in Florida (14% was the rate at that time for annuitants over
age 90). Ms. Kelly was so encouraged by her 14% gift annuity payouts that
she lived to be 111!
Another donor purchased a $100,000 gift annuity for cash from a west coast
charity. She also received a high percentage rate of return and was paid
one quarterly payment before passing away.
Some gift annuitants live a very long time – some pass away fairly quickly.
It is quite difficult to know what the probable life expectancy will be of
an individual. The concept of gift annuities and insurance is that the two
extremes will balance in the middle.
Mac Swenson loved the great outdoors. He grew up in the Big
Sky country of Montana. As soon as he could walk, Mac was on a pony. During
his teen years, Mac was riding horses every day. On weekends, he watched
with admiration as the older cowboys practiced riding bucking broncos at
the local rodeo grounds. By age 20, Mac was riding on the rodeo circuit. He
soon moved up to the most exciting event at the rodeo – bareback riding on
the wild and powerful Brahma bulls. Mac was lean and tough, and soon gained
a national reputation as a skilled and fearless Brahma bull rider.
As a top Brahma bull rider, Mac traveled on the rodeo circuit. At a rodeo
in Burwell, Nebraska, Mac watched with great interest as a lovely and
charming young lady named Glenda Olson was crowned the rodeo queen. Mac was
head over heels in love. At the square dance that evening, he asked Glenda
for the next dance. She was quick to accept. Love soon blossomed and Mac,
who will not be mistaken for Shakespeare in Love, told Glenda that she
meant more to him than even his horse Ranger.
Glenda was also in love with the handsome and athletic cowboy. She watched
the next day as he mounted the snorting Brahma bull. He gave the release
signal and the bull exploded from the pen. Within three seconds, Mac was
thrown violently and then kicked by the rampaging Brahma bull. To the
horror of Glenda and the crowd, Mac had broken his leg in three places and
was trying to crawl to safety. Fortunately, the rodeo clown heroically
distracted the angry Brahma bull and two cowboys dragged Mac to safety.
Glenda visited Mac in the hospital during his recovery. He realized that
his Brahma bull riding career was over, but a new life beckoned. Glenda and
Mac were married and he used the rest of his rodeo winnings to buy a small
ranch near the Beartooth Mountains in Montana. Over the years, Mac and
Glenda raised four children and steadily built up the ranch. Both loved the
great Big Sky country and planned to spend the rest of their days watching
the sun set over the Beartooth Mountains.
As Mac and Glenda reached their sunset years, the ranch was now over 7,000
acres. One day a new neighbor moved in to the ranch next door. Glenda
asked, "Who is our new neighbor?" Mac replied, "Some fellow
from California. I heard he is a director or movie star. Joe down at the
feed store claims his name is Bob Brown." Their neighbor Bob Brown was
gone all winter, but returned in the spring. Mac's leg injury was making it
steadily more difficult for him to manage the ranch, even with a seasoned
crew of cowboys to help him. Glenda said, "You know Mac, our four
children have left for the city and no one is here to manage the ranch. I
know we both love it here, but eventually you may need to think about
selling."
A few weeks later, their neighbor Bob Brown stopped in for a visit. He and
Mac enjoyed talking about cattle, the weather and the hay crop. After
hearing how Mac and Glenda had built up their ranch over the years, Bob
mentioned that he was looking for a way to expand the size of his ranch. If
Mac and Glenda are ready to consider retirement, how can they do this in a
way that reaches their goals. Mac and Glenda want to live in their home,
would like to give up managing the ranch, need a good retirement income,
and want to pass some benefits on to their children. And while he always
pays his fair share of taxes, Mac would like to make this transition with
no added taxes.
Note: Case studies, articles, commentary and other materials in the
GiftLaw system are included solely as educational information. Articles and
editorial comments are offered as an educational service to friends of this
organization, and may not always reflect our official position on any
issue. Since case studies or articles may not always reflect the current
AFR or tax law, it may be necessary to run any illustration with a current
version of Crescendo to obtain updated information. If professional
services are required, all persons shall consult with their qualified
professional advisors. Tax Quotes are courtesy of Jeffery L. Yablon,
Washington, D.C.
©
Copyright 1999-2010 Crescendo Interactive, Inc.
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