Don’t Jump from the Bridge… yet… President signs Patient Protection and Affordable Care Act

On March 23, 2010, President Obama signed into law H.R. 3590, the Patient Protection and Affordable Care Act as passed by the Senate on December 24, 2009, and by the House on March 21, 2010. This law is only the first installment of two pieces of legislation. The second piece of legislation was passed by the House on March 21, and has been taken up by the Senate under the reconciliation process.

H.R. 4872, the Health Care and Education Reconciliation Act of 2010, (i.e., the “Amendment in the Nature of a Substitute to H.R. 4872, as amended”) amends the health reform bill that the Senate passed in December to make it more palatable to House members. Assuming this second, “follow-on” bill passes the Senate (only a simple majority is needed under the reconciliation rules), it will be cleared for the President's signature, thus completing a massive overhaul of the U.S. health care system.

It never ceases to amaze me how often “the media” mangles details when it comes to taxes. Considering that Federal and state taxes constitute your single largest lifetime expense (Federal and state taxes will extract 75% or more of everything you make and/or own during your lifetime above certain limits Congress has deemed acceptable), one expects the media to be more careful.

The latest misinformation blitz began this past weekend with the hysteria surrounding the passage of health care legislation. Shortly after passage, we received a number of calls from taxpayer’s concerned about media reports that indicated that our Federal taxes are shooting through the roof. Although the legislation includes tax increases, those increases are not effective until 2013 (which means there is plenty of time for repeal if the mid-term elections reflect public disapproval of passage). Moreover, most of the increases the reportedly were passed actually are awaiting passage as part of the follow-on bill. The purpose of today’s post is to set the record straight with a quick summary. The summary assumes that all revenue provisions included in the follow-on bill will be enacted. In a later post, we’ll get into more details.

Summary

1. A 3.8 percent Medicare payroll tax will apply for the first time ever on investment income for those making more than $200,000 ($250,000 for joint filers).
2. The current 1.45 percent Medicare tax imposed on wages and self-employment income will increase by .9 percent to 2.35 percent for the same income group.
3. The adjusted gross income (AGI) threshold for claiming the itemized deduction for medical expenses is increased from 7.5 percent to 10 percent. However, the 7.5 percent-of-AGI threshold would continue to apply through 2016 to individuals age 65 and older (and their spouses).
4. The above 3 provisions will start in 2013; after the so-called Bush tax cuts expire this year, the top individual tax rate is expected to be 39.6.
5. The codified economic substance doctrine will apply to transactions entered into after the date of enactment of the follow-on bill.
6. If all of these tax increases go into effect, your top income tax rates will be approximately 90 percent of those applicable throughout the 1970s and significantly lower than those in effect throughout the 40’s, 50’s and 60’s.