The Truth About the New Health Reform

The health-care reform legislation that passed earlier this year was incredibly broad in scope, so it’s probably not surprising that there’s a good deal of confusion, and a number of false or misleading claims being circulated.  Here’s the truth behind two of the claims that have gained the most traction lately.

Tax on Health Insurance

The claim: Beginning in 2011, you’ll be taxed on the value of your employer-provided health insurance.

There are several email campaigns making their way around right now claiming that, beginning in 2011, taxable income on Forms W-2 will be increased to reflect the value of employer-provided health insurance.  A typical email warns: “You will be required to pay taxes on a large sum of money that you have never seen.  Take your last tax form and see what $15,000 or $20,000 additional gross income does to your tax debt.  That’s what you’ll pay next year.  for many it also puts you into a new higher bracket so it’s even worse.  This is how the government is going to buy insurance for the 15% who don’t have insurance and it’s only part of the tax increases.”

The facts: While it’s true that, beginning in 2011, the health-care reform legislation requires employers to begin reporting the cost of employer-provided health-care coverage on an employee’s Form W-2, the cost is included for informational purposes only, to show employees the value of their health-care benefits.  The amount reported is not included in income, and will not affect your tax liability.

Sales Tax on Real Estate

The claim: Beginning in 2013, a new federal sales tax will apply to the sale of a home.

The claim is that, beginning in 2013, all real estate sales will be subject to a new 3.8% federal sales tax.  The emails making this claim generally contain some variation of the following text:  “Under the new health-care bill – did you know that all real estate transactions are now subject to a 3.8% sales tax?  The bulk of these new taxes don’t kick in until 2013… if you sell your $400,000 home, there will be a $15,200 tax.”

The facts: This claim, though inaccurate, has a basis in fact.  There is no federal sales tax being imposed on the sale of homes.  But, beginning in 2013, the health-care reform legislation does impose a new 3.8% Medicare contribution tax on the net investment income of high-income taxpayers (individuals with adjusted gross income (AGI) exceeding $200,000, and married couples filing joint returns with AGI exceeding $250,000).  Net investment income will include only gain on the sale of a home.  However, the tax will not apply to any gain that is excludable from income.  Individuals, if they qualify, can generally exclude the first $250,000 in gain on the sale of a principal residence, while married couples filing jointly can generally exclude up to $500,000.  That means that in most cases, at least where a principal residence is concerned, the 3.8% tax would kick in only if your AGI exceeds the threshold above and only if profit on the sale of the home exceeds $250,000 ($500,000 for couples filing jointly).

In Closing

These two claims are good examples of how things can get out of hand when the complete facts aren’t fully understood.  The only way to completely understand what’s going on with the new law is to educate yourself – and to use trusted sources when educating yourself.  It’s important to know that not all emails and internet articles are to be fully trusted.  Know the source of the communication – and make sure that it’s someone you can trust to give you the complete picture.  And if you want to get a second opinion on something you’ve read, just let me know.  I’ll be happy to help out, as always.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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3 Comments

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  • Hello, John –

    If your gain in the value of your home (that is, the sale price minus the purchase price plus improvements) is $1,000,000 and it does not qualify for exclusions, then your calculations appear to be correct.

    If you’ve lived in the home as your primary residence for 2 of the previous 5 years, then $250,000 of gain can be excluded, or $500,000 if you’re married and you both meet the qualifications.

    Hope this helps –

    jb

  • My adjusted gross income is approximately $100,000 a year. The estimated taxable value of my home is $1,000,000 after adjustments.If I am correct in my understanding of this new 3.8% Federal sales tax, I will owe the Federal government $38,000 in addition to 15 to 20% capital gains tax or $200,000 and $80,000 to the state of CA for a total of $318,000. Wow!! Where does it end?

  • I have never been so confused about anything as I am about health care. I am on the edge of retirement and it just scares me something awful. I have a good health care program and I am making a go of it on what I have built up over the years. Now I feel like they are trying to take that away from me. My biggest pet peave about the health care bill is the way that they crammed it down our throats. When they did something like that it kind of got into my personal safe zone and I didn’t like it one bit. The arrogange of Obama, Reid and Pelosi will never be erased from my system. One of the biggest things about Pelosi was that when she was asked what was in the bill, she stated that we won’t know until we pass it. That did it for me. We pay those people to read it and discuss it. Another pusher of the bill actually stated to his constituants this, “you don’t expect me to read all of it, do you.” The answer was yes we do. I don’t trust anyone in the system or the people we have running this country at this time. Corruption and greed is rampant. You can smell it. House cleaning is on the agenda.

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