Introduction
While healthcare bills and the surrounding debate is far above our pay grades, we can discuss the tax changes in this "aircraft carrier behemoth" legislation. It is important to emphasize that nothing has been decided, thus our analysis is of the bill passed by the House of Representatives and the bills being formulated in the Senate. These bills have serious tax implications, yet fail to address a major tax inequity.
Prognostication
We would not be surprised to see the entire effort fail because of disagreements over the many issues involved. We would also be quite surprised to see the bill passed by the House become law. What seems to be happening is consensus for some type of health care reform. There is gathering momentum in Congress to regulate health insurance.
Tax Return Enforcement
A core element in these proposals is enforcement through the individual income tax return. After the level of mandatory heath coverage is determined, individuals not purchasing such coverage will be penalized as part of the annual income tax return filing. The penalty size is the subject of continuing debate. This would be very similar to the plan instituted in Massachusetts. It subjects non-conformers to additional taxes upon the filing of their state income tax returns.
Self-Employed Tax Inequity Not Addressed in Reform Proposals
Tax law treats employer and individually purchased health insurance differently. Employer-provided benefits are tax-favored for the employee, but post-tax for the self-employed. This blatant inequity forces the self-employed (and others not covered by employers plans) to pay additional taxes for equivalent coverage. Although this tax is somewhat hidden, it generally increases taxes by approximately 15% of the cost of insurance. This extra tax, coupled with the higher cost of individual health coverage in Maine, has created an untenable situation for many of our clients. This tax inequity has been talked about in Washington, but there has been no substantive action thus far.
Conclusion: Congress Should End the Inequity
It is refreshing to see that the House bill addressed the inequity in the tax treatment of employer provided health benefits for domestic partners. However, it has not addressed the inequity faced by millions of self-employed people across the country. We call on our legislators to act on behalf of the self-employed: ending this tax inequity is a step towards a reformed health insurance system.
If you have any questions regarding the health care issue, especially as it relates to your taxes, do not hesitate to contact us. We will be happy to share what we know with you.