Health Care Reform Act, Part I: 2010 Tax Changes

Now that the April 15th tax day has come and gone, it is time to look ahead at some of the tax law changes that have been enacted as part of the Health Care Reform Act.  Since there are so many changes, we'll examine them over a series of postings.

After a long and contentious process, Pres. Obama and the Democrats in Congress forced through a series of laws that resulted in a reform of the health care system.  The final piece, the Health Care and Education Reconciliation Act of 2010 was signed on March 30, 2010.  An estimated $437 billion in new taxes, fees, and penalties were enacted to partially pay for the nearly $1 trillion in costs, as estimated over the next 10 years.  The balance is supposed to be paid for by Medicare cost savings and other assumptions.  Several tax changes take effect in 2010.

First, a small employer tax credit is available to help offset the cost of employer-provided health insurance where the employer pays at least half of the premium cost.  A small employer is defined as one with no more than 25 employees whose average annual wages do not exceed $50,000.  In 2010 through 2013 a tax credit of up to 35% of the cost of the premium paid by the small employer is available.  After 2013, a 50% credit is available for two years if the insurance is purchased through an "insurance exchange."  The full tax credit is only available to small employers with 10 or fewer employees with average annual wages not exceeding $25,000.  The tax credit phases out as the number of employees or the average annual wages increases to 25 and $50,0000 respectively.  Very detailed rules apply to qualify for and compute the credit.

Second, the adoption tax credit for qualified adoption expenses is increased to $13,170 and becomes a refundable credit for 2010 and 2011.  The credit phases out for those with modified adjusted gross income from $182,520 to $222,520.

Third, a 10% excise tax is imposed on individuals paying for indoor tanning services provided on or after July 1, 2010.

Fourth, the so-called "economic substance doctrine" has been enacted into law effective for transactions entered into on or after March 30, 2010.  A transaction is treated as having economic substance only if it changes the taxpayer's economic position in a meaningful way (apart from federal tax effects) and the taxpayer has a substantial, non-tax purpose for entering into the transaction.  Failure to meet this standard will result in the loss of expected tax benefits and the imposition of a 20% or 40% penalty.  There are no exceptions to this penalty for disclosure or for reasonable cause.  This provision is not intended to affect normal business transactions or prevent the realization of tax benefits consistent with Congressional purpose.