Potential medical taxes

Thursday, June 4
Posted 4 p.m. EDT

This week, President Barack Obama asked Congress to once again focus on ways to overhaul America's health care system.

The projected cost of such an ambitious program is more than $1 trillion over 10 years. There's just no way Washington, D.C., can cut that much money from the budget, so we're looking at some new or increased taxes.

Although the House Ways and Means Committee is the panel constitutionally charged with originating all tax legislation, this policy debate has begun in the Senate.

The leaders of the Senate Finance Committee, Sen. Max Baucus, D-Mont., and Sen. Charles Grassley, R-Iowa, put together a "description of policy options."

Essentially, it's a conglomeration of ways to pay for revamping U.S. health care. A lot of the ideas will get some serious consideration. Others don't have much chance of passage at all.

This week, before jetting off to Egypt, Obama met with Congressional leaders to "encourage" them to get together on health care funding options. The president apparently even gave a bit himself in the debate.

One of those proposals in the Senate document is to modify the exclusion for employer-provided health coverage. Right now the tax code says that in most cases, employees are not taxed on the value of the health care they get at work, that is, that amount is excluded from their gross income. This costs the government more than $100 billion a year.

Although the official White House stance is that Obama does not want to go that route, some members of Congress at the meeting reported that it's still a possibility.

In the restructuring of our health care system, what other tax costs might you and I face?

Cut medical itemized deduction: Currently, taxpayers with unreimbursed medical expenses greater than 7.5 percent of their adjusted gross income can deduct those costs. Lawmakers say that repealing this deduction entirely or raising the floor so that fewer taxpayers could claim it would raise substantial money.

Politically, though, this could be a problem. Even though it's not a widely used deduction -- the Congressional Research Service says only 6 percent of all tax returns take the medical expense deduction -- people facing high medical costs like having the potential option of deductibility.

Curbs to HSAs and FSAs: Tax-free medical savings plans also are on the table. This includes health savings accounts, or HSAs, and medical flexible spending accounts, or FSAs.

Individuals enrolled in high-deductible health insurance plans can set up HSAs from which they can withdraw money to pay for qualified medical expenses. HSA contributions are not considered income for tax purposes, and the accounts' earnings accumulate tax-free as the balances roll over from year to year.

One proposal would restrict HSA contributions to the lesser of the individual's deductible amount or the statutory limit. A second option would increase the penalty from 10 percent to 20 percent for withdrawing money from an HSA for nonmedical expenses. A third proposal would require certification that HSA withdrawals were made for medical expenses.

FSAs also are a popular tax-advantaged way to save on medical costs. As with HSAs, FSA owners can contribute tax-free income to the account and then be reimbursed from it for eligible out-of-pocket medical expenses. Unlike HSAs, FSAs do not roll over from year to year; they operate on a use-it-or-lose-it basis. The Finance Committee is considering limiting the amount that can be contributed to an FSA or eliminating the accounts altogether.

Changes to HSAs are more likely than altering or eliminating FSAs.

Redefined medical expenses: Just what is a medical expense? The answer often depends on a taxpayer's personal circumstances. It also depends on where they are claimed. Some medical expenses allowed to be reimbursed by FSA money don't count as eligible expenses when you're itemizing medical costs on your Schedule A. The Senate tax-writers are looking at applying a standard, and tougher, definition of what is considered a qualified medical expenses.

Increased sin taxes: One area that's gotten a lot of attention is the proposal to create or increase so-called sin taxes. You know this tactic, make us pay for our unhealthy habits. In this case, Senators say taxes on alcohol, soda and other sugary drinks could bring in a lot of money.

Currently, distilled spirits, wine and beer produced in or imported into the U.S. are taxed at various rates. Instead, the Senate Finance Committee document "contemplates" imposing a uniform tax based on the alcohol content contained in the booze.

As for cans and bottles of Coke, Pepsi and, here in Texas, Dr Pepper, the Senators suggest a federal excise tax per 12 ounces of sugar-sweetened beverage, carbonated and uncarbonated. This would cover popular soft drinks, as well as fruit and vegetable drinks.

So which of these proposals would cause you some tax pain in exchange for helping you see a doctor for your other pains?


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