Health Insurance

A Look at the New GOP Healthcare Plan Part I

It pretty common to hear from my fellow Americans that we pay more for healthcare than most other countries  because we get better health (or better health outcomes). The evidence, however, clearly doesn’t support that view.  https://www.forbes.com/sites/danmunro/2014/06/16/u-s-healthcare-ranked-dead-last-compared-to-10-other-countries/#481e948d576f

The new bill being introduced this month will roll back many of the Obamacare taxes and eradicate the individual mandate. Instead of the subsidies available in the Affordable Care Act, the GOP plan provides Americans with refundable tax credits that can be used to purchase health insurance.

We will review tax credits and your taxes after first reviewing what medical and other deductions are in reference to your annual federal taxes.

The news currently presents the fact that the new plan will raise the annual contribution limits to equal the maximum sum of the deductible and out-of-pocket expenses one would pay in a high-deductible insurance plan. So the limit would be at least $6,550 for an individual and $13,100 for a family in 2018, but after that, they would decrease. Compare these to 2017 catastrophic plans which came with $7,150 deductibles with Obamacare citizens unable to use subsides to pay their premiums.  By 2026, the current administration states that the average premiums would be 10% lower than under the current Obamacare system.

Under Obamacare, an individual who makes more than $47,500 is not eligible for a subsidy which means they pay the full amount without any help.  The new plan is more fair as it would let a policyholder making up to $75,000 to be able to claim a full tax credit be progressively lowered and eventually zero when an individual earn $215,000 or more in income per year.

Getting back to the point, let’s first look at what taxes and healthcare deductions really mean to your annual taxes before going into what the proposed tax credits will do for you below.  I must warn you determining actual tax savings associated with deductions is somewhat complicated and there isn’t a very simple way to introduce it, but I will give it a try because it is important to understand if you are going to be welcoming or not of the new proposed plan.

At the end of the below example the most important take away is that deductions reduce the your taxes you owe by the amount of the deduction times the filer’s marginal tax rate; your tax rate.   It is true that this is worth more to taxpayers in higher tax brackets because their tax rate is higher but so is the threshold to expense their medical costs as you will soon see.

Most home owners paying a mortgage will expense the loan interest and some more notable expenses we pay during the year including charitable contributions, real estate taxes, and medical costs exceeding a threshold limit when filing the long Form 1040 with the accompanying Schedule A listing.

What do i mean you can expense your medical costs if they exceed a threshold?

The bottom line is that even before Obamacare we have been able to deduct medical costs that are greater than 10% of our Adjusted Gross Income (7.5% if over 65) which you itemize on Schedule A.

How do deductions reduce your annual federal taxes?  Deductions are not subtracted from the taxes you owe directly as tax credits do.   The best way to explain this may be by example.  Lets take that your income last year was $70,000 and you paid $10000 in medical bills.   You can then deduct $3,000 (=10000-70000×10%).  You put this amount on your Schedule A along with the other deductions listed above.  Lets say that after adding all your other deductions listed above the total deduction adds up to $6,300.  You save 25 cents on the dollar –  25% (6300*0.25=$1575) – that is subtracted from your taxes as the table below demonstrates.

So as you see deductions do not directly subtract from your taxes you owe, but it lessens the amount you owe.  At $70,000 you are in the 25% tax bracket and without deductions you would pay $13,294, but after deducting $1575, your tax bill is $11,719.  This is very simplified, in the table i show that the total taxes are progressive and you add the previous tax bracket tax amount until you reach your tax bracket.  I apologize for the images, but Win 10 took away easy access to my favorite image editor in favor of a new one that is more difficult to increase the image size without distorting the content.  I will improve my  images this week.

Now the media and everyone harp about the wealthier deducting more, but as a percent their pay tax bracket.  For example, a $10,000 deduction reduces taxes by $1,500 for people in the 15 percent tax bracket, whereas the same deduction cuts taxes by $3,500 for those in the 35 percent tax bracket.  The deduction is greater but so are the taxes they are supposed to pay.  It was a fair system.Enough said about this.

Now we can look at tax credits which are much simpler to understand.  Tax credits are subtracted not from your taxable income as deductions are, but are directly subtracted from your tax liability.  In the above example, the deductions are a percent on the dollar to determine taxes you actually owe, but tax credits reduce taxes dollar for dollar. So if the tax credit were $6300 (yea I am using the total deduction here), you would directly subtract this amount from the taxes you owe, $13,294.  So you would owe $6994, not the $11,719.  That’s pretty good, isn’t it?  There is one thing to now about tax credits as you may think you can actually subtract tax credits to the point you owe no taces or eben negative taxes (the gov owes you).   This is not true! Tax credits cannot reduce a filer’s tax liability below zero and this is referred to as nonrefundable.  As a result, credits have the same value for everyone who can claim their full value.

So to compare prior years tax credits individuals are allowed to subtract from their taxes, the new proposed plan medical tax credit would be graded by age and demographics, possibly.  Therefore, a 20-year-old would get a $2,000 tax credit, while a 64-year-old would get $4,000.  The current replacement proposal is a flat tax credit for individual incomes up to $75,000 and $150,000 for couples.  This would provide relatively more assistance to people with lower-middle incomes.   So the above medical income tax owed is $11,719 and now if you have a $2,000 tax credit you would owe $11, 294.   Its not much of a lowering, but it isn’t an increase at this level.  Of course deductibles and premiums are will continue to be more of a concern.

Table 1    Downloaded Spreadsheet IRS Table 3.3  All Returns: Tax Liability, Tax Credits, and Tax Payments in Excel,  https://www.irs.gov/uac/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income

Table 1    Downloaded Spreadsheet IRS Table 3.3  All Returns: Tax Liability, Tax Credits, and Tax Payments in Excel,  https://www.irs.gov/uac/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income

Under the Affordable Care Act, the low-premium, high-deductible health plans are called “bronze” plans — so think of this as the “bronzification” of the non-group market. The result: premiums may be lower in some cases, but deductibles will go up.  Well, at the cut off we couldn’t afford anything but the bronze plan and our deductible was $7100 before percents coverage began.  So low-premiums and deductibles for what I consider an average earning family was unaffordable.  Then add dental costs and we have no excess income left at the end of the month.

Let us take a look at the costs of the Bronze Coverage for a typical family of four at $1200 plus and deductibles of $13,500 plus.

The Silver Plans are mainly HMOs with much high premium and the PPO has a $3,000 a year less deductible, but at monthly average rates of $1700 plus.

This is not affordable for most families at $100,000 with a mortgage and any other debt. Obamacare exchanges receive assistance except individuals making more than $47,500 and families earning more than $97,200.

Under the new plan, tax credits start to phase out for those making more than $75,000 and would no longer be eligible for any if making more than $215,000. Families with incomes above $150,000 would see tax credits fade and families earning more than $290,000 would not qualify for any.

More research to come as information becomes available.

Humbly yours,

Diana

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