Popular Tax Myths About the Health Care Reform Legislation

This week President Obama intends to address Congress to encourage them to pass their health care reform bill. However, with recent polls showing that a majority of Americans either moderately or strongly oppose the current legislation, getting members of Congress to vote in favor of it is going to be difficult. As the debate continues, it seems like television commercials and e-mail blasts are going out left and right to either promote or discredit the bill. To help people confused by some of the claims being made in these advertisements I have put together the following list of the top tax myths about the health care reform bill.

The Bill is Fully Funded

President Obama has repeatedly claimed that the health care overhaul will be paid for, and that he would not sign a bill that is not "deficit-neutral." The plan to raise taxes on the top income earners is expected to generate $239 billion in additional federal revenue over the next ten years. However, the reform is expected to cost more than $600 billion. Obama stated that his team has identified cuts to pay for the rest of the bill, including cuts to Medicare and payments to insurers and practitioners. However, these cuts are quite unpopular and have a history of never coming to fruition. This has left many wondering if Obama will go back on his promise and sign a bill that will increase the national debt and ultimately lead to additional tax increases.

US Taxpayers will Pay for Heath Care for Illegal Immigrants

Although there has been speculation that over 5 million illegal immigrants will be covered by Obama's health care plan, it is almost entirely a fabrication. The bill drafted by the House of Representatives specifically says that no money will be spent giving illegal immigrants health care. H.R. 3200: Sec 246 claims "nothing in this subtitle shall allow Federal payments for affordability credits on behalf of individuals who are not lawfully present in the United States."

The Government Health Agency will have Unlimited Access to Taxpayer's Financial Information

The myth that the government's new health care agency will have access to every American's financial information has been making the rounds for a few weeks. The actually legislation does allow the government to get certain information about taxpayers attempting to qualify for health benefits. However, the bill limits the information that can be requested to "(i) taxpayer identity information with respect to such taxpayer, (ii) the filing status of such taxpayer, (iii) the modified adjusted gross income of such taxpayer (as defined in section 59B(e)(5)), (iv) the number of dependents of the taxpayer, (v) such other information as is prescribed by the Secretary of regulation as might indicate whether the taxpayer is eligible for such affordability credits (and the amount thereof)." Additionally, the bill also limits the use of the information to only establishing and verifying the appropriate credit, "and providing for the repayment of any such credit which was in excess of such appropriate amount."

Employers Not Offering the Public Option will Pay an Additional 8% Tax

This myth is actually somewhat based in fact, except is has been exaggerated slightly. The current health care bill does require employers to either offer private health benefits or help pay for the public option through additional taxes. Employers with annual payrolls over $400,000 will have to pay 8%, and those with payrolls between $250,000 and $400,000 will pay a lesser amount. However, employers with payrolls under $250,000 will not have to pay an additional tax or be forced to offer health benefits.

Taxpayers without Acceptable Health Care will Pay 10% or More in Taxes

As part of the health care package, there is a mandate requiring everyone to have insurance. Therefore, those without acceptable coverage will have to pay a penalty. There have been dozens of rumors swirling around that this penalty could exceed 10% or more, however the actual bill calls for a penalty of 2.5% of a taxpayer’s adjusted gross income, not exceeding the national average premium for individual coverage.

Estate Taxes will be Locked in Before a Taxpayers Death

This claim, along with others of a suicide council, are all misinterpretations of a provision to the House's bill asserting that Medicare will cover voluntary end-of-life counseling sessions between seniors and their doctors. These sessions can include topics such as hospice care, creating a living will, etc. However, there is no mention of forcing taxpayers to lock in their estate taxes while on their deathbeds.

CBPP: House Health Bill’s “A Reasonable Approach”

Last Friday, the Center on Budget and Policy Priorities released a study examining the House of Representative’s much-discussed proposal for funding health care reform. They call the plan “a reasonable approach” and assert that the “impact on small businesses would be modest.” However, as the recession continues, even a small tax increase could delay recovery. Check out a snippet from their study below, but be sure to check out the full explanation of the study (including graphs) at CBPP.org.

Reforming the health care system to provide universal health coverage is an urgent priority. But, facing huge projected budget deficits that have the nation on an unsustainable fiscal path, the White House and Congress must enact a health reform plan that is also fully financed and that reduces the growth rate of health care costs over the long term.

Policymakers have been considering two major proposals to help finance health care reform that represent sound tax policy: (1) limiting the tax exclusion for employer-provided health benefits, and (2) capping the value of itemized deductions at 28 percent or a somewhat higher level. Capping the exclusion has the added benefit of helping slow the growth of health care costs. House Democrats have now advanced a third major proposal that also represents sound tax policy: imposing a graduated surcharge on high-income taxpayers.

The House surcharge proposal is reasonable and well targeted. In recent decades, incomes have grown disproportionately for households at the top of the income scale, while their tax burden has fallen substantially. Moreover, despite charges to the contrary, the proposal would have only a small impact on small businesses. The congressional Joint Tax Committee estimates that it would have no impact at all on 96 percent of small business owners — broadly defined as any taxpayer with as little as $1 of business income — and that only half of the 4 percent of small business owners who would be affected derive more than a third of their income from a business. At the same time, the House plan would enhance the ability of small businesses to offer affordable, quality health insurance to their employees.

High-Income Households Have Far Outpaced Others in Recent Decades

The surcharge would affect only the highest-income 1.2 percent of taxpayers, according to the Joint Tax Committee. Very high-income households have benefited handsomely — both absolutely and compared to the rest of the population — from both recent trends in pre-tax incomes and recent changes in tax policy. Congressional Budget Office data show that between 1979 and 2006 (the most recent year for which these data are available): [3]

The before-tax income of the top 1 percent of U.S. households increased by 226 percent, on average (after adjusting for inflation), compared to an increase of just 15 percent for families in the middle fifth of the income spectrum.

Democrats Weigh Health Mandate as Obama Urges Taxing Wealthy

According to Bloomberg.com the Obama Administration and Democratic leaders in Congress are looking to increase taxes on the wealthy in this country in order to pay for a health care overhaul. Check out the text of their article below.

The Obama administration stepped up efforts to influence health-care legislation today as advisers David Axelrod and Austan Goolsbee appeared on television talk shows to discuss the issue.

The president is trying to avoid broad-based levies such as a Senate proposal to tax some employer-provided health benefits Axelrod said. Instead he is urging lawmakers to reconsider limiting all tax deductions for Americans in the highest tax brackets.

“He made a very strong case for the proposal that he put on the table, which was to cap deductions for high-income Americans, and he urged them to go back and look at that,” Axelrod said on the CNN’s “State of the Union.” Goolsbee, appearing on “Fox News Sunday,” said Obama is “mindful” about how “ordinary Americans are able to foot the bills” and never proposed taxing employee benefits.

House Democrats are weighing a new proposal in response to Obama’s call for legislation to be enacted by August. An outline of the plan obtained by Bloomberg News would require Americans to have insurance with some exceptions.

It would probably exempt those who can prove they can’t find an affordable policy. There could be a tax penalty for those with adequate financial resources who don’t elect to get insurance, according to the outline.

The outline suggests consumers who have individual health insurance policies that they like could keep them. Still, it says that “by and large” the nation’s market for individually purchased health insurance policies would move to a new federally operated exchange. It would permit both individuals and employees of small firms to buy policies at less expensive group rates.

“States will have the option to run a state exchange but the default will be a national exchange,” according to the outline.

Karen Lightfoot, a spokeswoman for House Energy and Commerce Committee Chairman Henry Waxman, a California Democrat whose panel is working on a proposal, said the document that is circulating is not the official work of the committee.

All House Democrats will be briefed June 9 on the details of a single piece of legislation that three House committees will work on, with the House slated to act by the end of July. The proposal is part of a broader push by Democrats in Congress to complete a revamp of the U.S. health-care system by an early fall timetable set by Obama.

Recession Hurts Medicare and Social Security

From Reuters.com:

The U.S. Social Security and Medicare retirement and health programs for the elderly will run short of funds sooner than previously thought because the recession has taken a toll on tax revenues, a government report released on Tuesday showed.

The Social Security trust fund will be exhausted by 2037, four years earlier than previously estimated, and the Medicare hospital trust fund will become insolvent by 2017, two years earlier than estimated, said a report by the trustees of the two popular programs.

Labor Secretary Hilda Solis said that "the dual effect of the economy and unemployment has produced a downward pressure on the financial security" of the Social Security program.

The latest report said Medicare's financial problems are more severe than those facing Social Security because of rapidly rising health-care costs.

Treasury Secretary Timothy Geithner said the report shows the urgency for the government to overhaul the two programs to help contain rising costs as the baby boom generation begins to retire and draw on benefits.

"The sooner we come together to make the difficult but achievable changes needed to strengthen the solvency of Medicare and Social Security, the more time we'll give the American people to plan and to adjust, and the sooner we'll be able to ensure that these vital programs will be as important for generations to come as they are today," Geithner, one of trustees of the two programs, said at a news conference.

For years, lawmakers have been concerned about the long term financing of the two programs as the 77 million strong baby boom generation retires.

A push by former President George W. Bush to partially privatize Social Security by creating individual investment accounts failed in the face of stiff opposition from Democrats.

Six Ways to Fund IRS Payments

From CNBC.com:

If you're like millions of other small-business owners across the country, your business has practically fallen off a cliff in the past few months.

For some owners, there's even more bad news. A decline in business means that revenue you were relying on to fund a payment to the Internal Revenue Service April 15 won't be there when you need it.

The good news is that if you find yourself in that nail-biting situation, you may have at least six ways to free up money to pay the IRS.

1. 'Borrow' from the government

"You can ask the IRS for a payment plan," says Buz Aaron, CPA, senior tax manager at Braver PC in Newton, Mass., "and the government will allow you to apply for, in effect, a loan from it."

There is, of course, a downside to borrowing from the IRS. "Interest rates on IRS installment loans range from 7 (percent) to 12 percent," says Michael T. Hanley, CPA, managing partner at Merl & Hanley LLP in Smithtown, N.Y. "It varies based on the prime rate." You'll also have to pay a "user fee" that ranges from $43 to $105 depending on your financial condition.

There's also a process you must follow. "A lot of people say, 'I can't pay what I owe, so I'm not going to file my tax return,'" Hanley explains. "But the best option is to let the IRS know you can't pay. If you do that, the IRS will make a lot of concessions. A lot of times they'll stop assessing penalties from the day you've filed for the payment plan. Or maybe they'll fix the interest rate. So the best course is to be up front and work with the IRS."

If you owe $25,000 or less, you can request a payment plan online at IRS.gov through Form 9464, called an Online Payment Agreement. If you owe more than $25,000, you must print, complete and mail forms 9465 and 433-F.

"Because of tight credit, there are going to be a lot more business owners who'll be taking advantage of IRS payment plans than in the past," Aaron says. "It's easy credit because you don't have go through a credit check. You simply have to fill out a form."