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Ask the taxgirl: Health Care Benefits and Taxes

June 3, 2010 · 9 comments

Taxpayer asks:

My brother works for a company who pays $12K a year for his health insurance
He is 64, single, no children, no ex-wife
My brother understands starting in 2011 the government will treat the $12K as income and he will be taxed on it
Also because it is over $8,000 a year it is considered a Cadillac plan and he will also have to pay a 40% penalty on the extra $4K
So he estimates he will have to pay an extra $450 a month in extra taxes
Is this fact ?
Will this be worse for married couples with children?

Thanks in advance

Taxgirl says:

*Sigh* This is the problem with the health care bill. It’s so giant that very few people have read it (including many in Congress). It’s no wonder, then, that many taxpayers are confused about what it actually means for them. I think your brother is one of them; it sounds like he’s operating under a couple of misconceptions. Let me see if I can clear it up for him.

For tax years beginning after December 31, 2010 (the fancy way of saying the 2011 tax year), employers will be required to report health care benefits on a form W-2. This is a reporting requirement. It is not a taxing requirement. In other words, your health care benefits won’t be taxed any differently for the 2010 (or 2011) tax year as they were for 2009. In fact, there is not a provision in the new law to tax health care benefits for individual taxpayers. If you receive one of those chain emails stating otherwise, ignore it. It’s a fake. If you want to see for yourself, the reporting requirement is at section 9002 of the new law.

With respect to the Cadillac plans, the excise tax on these plans is not effective until 2018. The amounts have increased so that the threshold amount for singles is $10,200 and the threshold amount for families is $27,500. There are some exceptions to those amounts (they’re higher in some instances) and they are indexed for inflation. More importantly, the tax is on the insurer, not on the insured. (Do I think that those amounts will eventually be passed along to the consumer? Sure I do. But for now, it’s not a direct tax.) This provision is located at section 9001 of bill and section 1401 of the reconciliation bill.

You can read my original summary of some of the highlights of the law here. And if you want to read the whole kit and caboodle – all 906 pages of it – you can download it as a pdf here. The reconciliation act – just 55 pages – can be downloaded as a pdf here.

I hope that clears up some of the confusion!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!Now on Facebook at http://www.facebook.com/taxgirl

{ 6 comments… read them below or add one }

1 Rita June 3, 2010 at 10:25 pm

Great summary. Thanks for all your work.

2 Elizabeth R. June 4, 2010 at 7:54 am

I’m glad I’m not the only one receiving these questions!

3 Wayne Phillips June 4, 2010 at 8:01 am

This was great explanation and shows a lot of research. More than can be said for Congress.

4 Lisa G July 21, 2010 at 11:03 am

Thank you for this information, I’ve been arguing with several folks about this very topic over the last couple of days. I’ll tell you they almost had me convinced ~ would seem to be a quick way to increase tax revenues…

At any rate, your post provides a link to the ACT and the reconcilation, but the particular section (9002) isn’t very informative, just says what puncuation/words were added or changed in the code. Do I have to go to the IRC to get the full text of what this section now says? I was hoping to find a table or something the gives “old language – new language”; does that exist?

Thanks

5 Kelly July 21, 2010 at 4:26 pm

Hi Lisa, I’ve done that for section 9003 but not section 9002. Look for it in an upcoming post.

6 BOB November 10, 2010 at 10:31 pm

CAN I WORK FOR ONLY HEALTH BENEFITS AND AVOID PAYING ANY STATE OR FED, TAXES?

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