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VCA Panorama Issue 4

Craig Brubaker
Craig Brubaker

The Supreme Court upheld most provisions of the Affordable Care Act, including the individual mandate. This preserves many of the ACA's tax provisions and insurance reforms. While the individual mandate was found to be a valid use of Congress' taxing power, the Medicaid expansion was ruled too coercive for states. Employers and individuals need to review how the ruling and ACA provisions may impact their situations going forward.

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Panorama July 2012 VOLUME 1, ISSUE 4 The Affordable Care Act is Constitutional On June 28, 2012, the United States Supreme Court issued its long-awaited de- In this Issue: cision on the constitutionality of the Patient Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation The Affordable Care Act is Act (HCERA). In a nutshell, the nations highest court upheld the law except Constitutional for certain Medicaid provisions. The 5 to 4 decision preserves many far- reaching tax provisions and health insurance reforms. In coming months, law- Charitable Gift Annuities makers and legal scholars will examine all of the nuances of the Courts highly Can Provide Retirement complex decision. More immediately, individuals and businesses are concerned Income about what steps they need to take next. Start Thinking About 2012 Individual Mandate Yearend Capital Gains Planning Now The PPACA includes a shared responsibility requirement for individuals. This has come to be known as the individual mandate. Broadly, this provision re- quires individuals to obtain minimum essential health coverage or pay a penalty starting in 2014. Many individuals, however, are exempt from the pen- alty. These include individuals covered by Medicare and Medicaid, individuals with coverage under military health plans, undocumented individuals, and oth- ers. The PPACA also imposes no penalty on individuals who cannot afford coverage. Additionally, individuals with employer-provided coverage generally are treated as having minimum essential coverage and are exempt from the pen- alty unless the coverage is deemed unaffordable. In National Federation of Independent Business et al. v. Sebelius, June 28, 2012, Chief Justice Roberts and Justices Ginsburg, Breyer, Sotomayor, and Ka- gan found that the individual mandate was a valid exercise of Congress taxing
Story continued from front ... 8. Excise tax on certain medical devices The Affordable Care Act 9. Indoor tanning excise tax 10. Tax credit for therapeutic discovery projects power under the Constitution. Under the mandate, 11. Disclosure of cost of employer-provided coverage if an individual does not maintain health insurance, on Forms W-2 for informational purposes the only consequence is that he must make an addi- 12. Limits on use of health FSA dollars on over-the- tional payment to the IRS when he pays his taxes. counter medications That, according to the Government, means the man- 13. Enhanced simple cafeteria plan rules for small date can be regarded as establishing a condition businesses not owning health insurancethat triggers a tax 14. Changes to retiree prescription drug subsidies the required payment to the IRS. Under that theory, 15. Codification of the economic substance doctrine the mandate is not a legal command to buy insur- 16. Branded prescription drug fees ance. Rather, it makes going without insurance just 17. Reforms for charitable hospitals another thing the Government taxes, like buying 18. Reporting requirements for sponsors of health gasoline or earning income. care coverage The majority concluded: Our precedent demon- The PPACA also imposes a penalty on applicable em- strates that Congress had the power to impose the ployers (generally employers with more than 50 full- exaction in Section 5000A under the taxing power, time employees) that do not provide affordable health and that Section 5000A need not be read to do more insurance coverage to their employees. The penalty is than impose a tax. That is sufficient to sustain it. scheduled to take effect after 2013. Employers need to review their coverage to determine if it satisfies the Justices Scalia, Kennedy, Thomas, and Alito dis- minimum essential coverage and affordability require- sented. According to the dissenting justices, the ma- ments under the PPACA. Employers also should re- joritys decision that the individual mandate imposes view their benefits packages for compliance with the a tax in essence was a rewrite of the PPACA and not PPACA. an interpretation. The dissenting justices would have struck down the entire law. Since passage of the PPACA/HCERA, the IRS and the U.S. Departments of Health and Human Services Tax Provisions (HHS) and Labor (DOL) have issued extensive guid- ance on the new law. The pace of guidance is expected Along with the individual mandate, the PPACA in- to accelerate now that the law has been upheld by the cludes many tax provisions, which remain law. It Supreme Court. cannot be over-emphasized that the tax provisions impact nearly every individual and business. Perspective Heres a summary of some of the tax-related provi- Strength sions: 1. Code Sec. 45R small employer health insurance tax credit Insurance Reforms 2. Additional Medicare tax for higher income indi- viduals Along with the tax-related provisions we have dis- 3. Medicare tax on investment income cussed, the PPACA has set in motion many insurance 4. Contribution limits on health flexible spending reforms. They include: arrangements (health FSAs) 5. Increased itemized medical expense deduction 1. Enhanced coverage for certain dependents threshold 2. Summary of benefits coverage and uniform glos- 6. Excise tax on high-dollar health insurance plans sary 7. Additional tax on distributions from health sav- 3. New rules for internal and external reviews of ings accounts (HSAs) and certain other arrange- adverse decisions by health insurance carriers ments 4. Patients bill of rights
Insurance Reforms (cont) ... Integrity 5. New rules for preventive services Like the tax provisions, federal agencies have been Innovation busy issuing guidance on the insurance reforms. More guidance is expected in coming weeks and months. Character Health Insurance Exchanges CharitableGift Annuities Can Provide The PPACA requires every state to establish an Retirement Income American Health Benefit Exchange and Small Busi- ness Health Options Program (SHOP Exchange) to A charitable gift annuity is a contract between a donor provide qualified individuals and qualified small and a qualified charity, whereby the donor irrevocably business employers access to qualified health transfers cash or property to the charity in exchange for plans. Some states have already begun the process of a partial tax deduction and a lifetime stream of annual setting up exchanges. Other states waited to see the income from the charity. When the donor dies, the char- outcome of the Supreme Court case. ity keeps the remainder of the original gift. A portion of the payments are considered to be a partial tax-free re- Medicaid turn of the donor's gift, which are spread in equal pay- ments over the life expectancy of the annuitant. The PPACA also expanded Medicaid to cover more individuals with incomes below 133 percent of the The amount of the income stream is determined by federal poverty level. The federal government would many factors including the donor's age and the policy of cover 100 percent of the Medicaid costs of the newly the charity. Most charities use payout rates defined by eligible individuals, with the percentage dropping to the American Council on Gift Annuities. 90 percent (with states covering the difference) by 2020. States would be required to make up the differ- Lets use an example to show how this works. Assume ence. The PPACA also set minimum essential levels John Smith, age 70, has $100,000 in cash at his bank of Medicaid coverage and made other changes. States earning 0.25% annually. John also has a need for retire- that fail to comply with the PPACA risk termination ment income and has a desire to benefit his church, a of all Medicaid funding from the federal government. qualified charitable organization, at his death. John en- ters into a charitable gift annuity contract with his The Supreme Court held that Congress could expand church whereby he gives them the $100,000 today. Medicaid. However, Congress could not penalize states that choose not to participate in the expansion What does John get? He gets a charitable income tax by taking away their Medicaid funding. deduction for a portion of his $100,000 donation in the year of gift, and he receives an annual payment from his Looking Ahead church in the amount of $5,100, each year for the rest of his life. Compare this to the $250 in annual interest that Employers, taxpayers indeed everyone must pre- the account generated at the bank. A portion of each an- pare for sweeping changes in health care in coming nuity payment is taxable to John each year. years. Many of the provisions in the PPACA have already been implemented or are in the process of The annuity rate used by Johns church is based on being implemented. Other provisions are scheduled to Johns age and the current suggested annuity rate tables take effect after 2012. The Supreme Courts uphold- provided by the American Council for Gift Annuities. ing of the PPACA clears the way for implementation Given the pathetic yields of the current markets, this of the new law (unless a future Congress votes to re- strategy could be a nice fit for individuals with the right peal the law). facts and circumstances.
Start Thinking About 2012 Yearend less, dispose of it with a view of maximizing its remain- ing economic value, which could disappear altogether Capital Gains Planning Now while you are spending time fashioning your tax plan- ning strategy. We discussed in the first quarter 2012 Panorama newsletter the expected change in rates on capital Given the complexities and myriad possibilities one gains when the Bush Tax Cuts expire at the end of could face and the personal nature of decisions like 2012. As a reminder, the 2012 long-term capital these, we would recommend that you not wait until the gains rate is 15% and 35% for short-term capital end of the year as most are inclined to do to address this gains. Beginning January 1, 2013, the long-term capi- subject. Gather your current realized and unrealized tal gains rate increases to 20% and the short-term gains and losses for the year to date, and schedule an capital gains increases to 39.6%. Unfortunately, you appointment with your income tax advisor. It will likely also have to add onto each base rate another 1.2% to be worth the effort. reflect the return of the 3% disallowance of itemized deductions and an additional 3.8% on investment in- come, including capital gains, for incomes above cer- tain thresholds for the new Medicare tax. Ill stop there, it could get even worse if President Obamas Buffett Rule is passed, which could impose a mini- mum tax rate of 30% on realized long-term capital gains on millionaires. Integrity Traditional year end capital gains tax planning con- templates accelerating losses into the current year Innovation (referred to as tax loss harvesting) and deferring the recognition of gains into next year. Further, where capital loss carryovers exist, taxpayers are generally Character inclined to use them as soon as possible to get the most time value tax benefit. Capital gains tax planning for 2012 requires counter- intuitive thinking. Taxpayers should review their un- realized gain positions on their capital assets and seri- ously consider recognizing (selling) those gains in 2012 to get the benefit of the lower rates. Con- versely, capital losses become more valuable in 2013 when rates increase. So, a viable strategy may be to postpone recognizing capital losses, or capital loss carryovers until 2013 to shelter higher tax rates. Keep in mind that even in 2012, the short-term capi- tal gains rates are still 35%. So, there is nothing wrong with harvesting capital losses or using capi- tal loss carryovers to offset realized short-term capital gains in 2012. A word of caution, dont let common sense get lost in this convoluted process of tax planning. If you hold a stock that is in serious jeopardy of becoming worth-
View Capital Advisors, LLC was founded in 2004 by its principals with the mission of providing sophisticated Contributing to this issue: investment asset management and financial and estate planning to our U.S. and Non-U.S. clients. R. Craig Brubaker I. Michael Goodrich We seek to bring wealth planning best practices and a wide range of non-proprietary solutions to our clients. We also conduct our own research and diligence on 2000 McKinney Avenue, Suite 600 world markets and investment alternatives. Dallas, TX 75201 For further information, please contact your investment 214-855-2550 representative or one of our wealth planning specialists: www.view-cap.com R. Craig Brubaker 214-855-2556 cbrubaker@view-cap.com I. Michael Goodrich 214-855-2552 mgoodrich@view-cap.com To ensure compliance with requirements imposed by U.S. Treasury Regulations, View Capital Advisors, LLC, and its affiliates, informs you that any U.S. tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. View Capital Advisors, LLC provides asset allocation and investment advisory services through its affiliated registered invest- ment advisor, View Capital RIA, LP and provides trade execution services through its affiliate, VCA Securities, LP.

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VCA Panorama Issue 4

  • 1. Panorama July 2012 VOLUME 1, ISSUE 4 The Affordable Care Act is Constitutional On June 28, 2012, the United States Supreme Court issued its long-awaited de- In this Issue: cision on the constitutionality of the Patient Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation The Affordable Care Act is Act (HCERA). In a nutshell, the nations highest court upheld the law except Constitutional for certain Medicaid provisions. The 5 to 4 decision preserves many far- reaching tax provisions and health insurance reforms. In coming months, law- Charitable Gift Annuities makers and legal scholars will examine all of the nuances of the Courts highly Can Provide Retirement complex decision. More immediately, individuals and businesses are concerned Income about what steps they need to take next. Start Thinking About 2012 Individual Mandate Yearend Capital Gains Planning Now The PPACA includes a shared responsibility requirement for individuals. This has come to be known as the individual mandate. Broadly, this provision re- quires individuals to obtain minimum essential health coverage or pay a penalty starting in 2014. Many individuals, however, are exempt from the pen- alty. These include individuals covered by Medicare and Medicaid, individuals with coverage under military health plans, undocumented individuals, and oth- ers. The PPACA also imposes no penalty on individuals who cannot afford coverage. Additionally, individuals with employer-provided coverage generally are treated as having minimum essential coverage and are exempt from the pen- alty unless the coverage is deemed unaffordable. In National Federation of Independent Business et al. v. Sebelius, June 28, 2012, Chief Justice Roberts and Justices Ginsburg, Breyer, Sotomayor, and Ka- gan found that the individual mandate was a valid exercise of Congress taxing
  • 2. Story continued from front ... 8. Excise tax on certain medical devices The Affordable Care Act 9. Indoor tanning excise tax 10. Tax credit for therapeutic discovery projects power under the Constitution. Under the mandate, 11. Disclosure of cost of employer-provided coverage if an individual does not maintain health insurance, on Forms W-2 for informational purposes the only consequence is that he must make an addi- 12. Limits on use of health FSA dollars on over-the- tional payment to the IRS when he pays his taxes. counter medications That, according to the Government, means the man- 13. Enhanced simple cafeteria plan rules for small date can be regarded as establishing a condition businesses not owning health insurancethat triggers a tax 14. Changes to retiree prescription drug subsidies the required payment to the IRS. Under that theory, 15. Codification of the economic substance doctrine the mandate is not a legal command to buy insur- 16. Branded prescription drug fees ance. Rather, it makes going without insurance just 17. Reforms for charitable hospitals another thing the Government taxes, like buying 18. Reporting requirements for sponsors of health gasoline or earning income. care coverage The majority concluded: Our precedent demon- The PPACA also imposes a penalty on applicable em- strates that Congress had the power to impose the ployers (generally employers with more than 50 full- exaction in Section 5000A under the taxing power, time employees) that do not provide affordable health and that Section 5000A need not be read to do more insurance coverage to their employees. The penalty is than impose a tax. That is sufficient to sustain it. scheduled to take effect after 2013. Employers need to review their coverage to determine if it satisfies the Justices Scalia, Kennedy, Thomas, and Alito dis- minimum essential coverage and affordability require- sented. According to the dissenting justices, the ma- ments under the PPACA. Employers also should re- joritys decision that the individual mandate imposes view their benefits packages for compliance with the a tax in essence was a rewrite of the PPACA and not PPACA. an interpretation. The dissenting justices would have struck down the entire law. Since passage of the PPACA/HCERA, the IRS and the U.S. Departments of Health and Human Services Tax Provisions (HHS) and Labor (DOL) have issued extensive guid- ance on the new law. The pace of guidance is expected Along with the individual mandate, the PPACA in- to accelerate now that the law has been upheld by the cludes many tax provisions, which remain law. It Supreme Court. cannot be over-emphasized that the tax provisions impact nearly every individual and business. Perspective Heres a summary of some of the tax-related provi- Strength sions: 1. Code Sec. 45R small employer health insurance tax credit Insurance Reforms 2. Additional Medicare tax for higher income indi- viduals Along with the tax-related provisions we have dis- 3. Medicare tax on investment income cussed, the PPACA has set in motion many insurance 4. Contribution limits on health flexible spending reforms. They include: arrangements (health FSAs) 5. Increased itemized medical expense deduction 1. Enhanced coverage for certain dependents threshold 2. Summary of benefits coverage and uniform glos- 6. Excise tax on high-dollar health insurance plans sary 7. Additional tax on distributions from health sav- 3. New rules for internal and external reviews of ings accounts (HSAs) and certain other arrange- adverse decisions by health insurance carriers ments 4. Patients bill of rights
  • 3. Insurance Reforms (cont) ... Integrity 5. New rules for preventive services Like the tax provisions, federal agencies have been Innovation busy issuing guidance on the insurance reforms. More guidance is expected in coming weeks and months. Character Health Insurance Exchanges CharitableGift Annuities Can Provide The PPACA requires every state to establish an Retirement Income American Health Benefit Exchange and Small Busi- ness Health Options Program (SHOP Exchange) to A charitable gift annuity is a contract between a donor provide qualified individuals and qualified small and a qualified charity, whereby the donor irrevocably business employers access to qualified health transfers cash or property to the charity in exchange for plans. Some states have already begun the process of a partial tax deduction and a lifetime stream of annual setting up exchanges. Other states waited to see the income from the charity. When the donor dies, the char- outcome of the Supreme Court case. ity keeps the remainder of the original gift. A portion of the payments are considered to be a partial tax-free re- Medicaid turn of the donor's gift, which are spread in equal pay- ments over the life expectancy of the annuitant. The PPACA also expanded Medicaid to cover more individuals with incomes below 133 percent of the The amount of the income stream is determined by federal poverty level. The federal government would many factors including the donor's age and the policy of cover 100 percent of the Medicaid costs of the newly the charity. Most charities use payout rates defined by eligible individuals, with the percentage dropping to the American Council on Gift Annuities. 90 percent (with states covering the difference) by 2020. States would be required to make up the differ- Lets use an example to show how this works. Assume ence. The PPACA also set minimum essential levels John Smith, age 70, has $100,000 in cash at his bank of Medicaid coverage and made other changes. States earning 0.25% annually. John also has a need for retire- that fail to comply with the PPACA risk termination ment income and has a desire to benefit his church, a of all Medicaid funding from the federal government. qualified charitable organization, at his death. John en- ters into a charitable gift annuity contract with his The Supreme Court held that Congress could expand church whereby he gives them the $100,000 today. Medicaid. However, Congress could not penalize states that choose not to participate in the expansion What does John get? He gets a charitable income tax by taking away their Medicaid funding. deduction for a portion of his $100,000 donation in the year of gift, and he receives an annual payment from his Looking Ahead church in the amount of $5,100, each year for the rest of his life. Compare this to the $250 in annual interest that Employers, taxpayers indeed everyone must pre- the account generated at the bank. A portion of each an- pare for sweeping changes in health care in coming nuity payment is taxable to John each year. years. Many of the provisions in the PPACA have already been implemented or are in the process of The annuity rate used by Johns church is based on being implemented. Other provisions are scheduled to Johns age and the current suggested annuity rate tables take effect after 2012. The Supreme Courts uphold- provided by the American Council for Gift Annuities. ing of the PPACA clears the way for implementation Given the pathetic yields of the current markets, this of the new law (unless a future Congress votes to re- strategy could be a nice fit for individuals with the right peal the law). facts and circumstances.
  • 4. Start Thinking About 2012 Yearend less, dispose of it with a view of maximizing its remain- ing economic value, which could disappear altogether Capital Gains Planning Now while you are spending time fashioning your tax plan- ning strategy. We discussed in the first quarter 2012 Panorama newsletter the expected change in rates on capital Given the complexities and myriad possibilities one gains when the Bush Tax Cuts expire at the end of could face and the personal nature of decisions like 2012. As a reminder, the 2012 long-term capital these, we would recommend that you not wait until the gains rate is 15% and 35% for short-term capital end of the year as most are inclined to do to address this gains. Beginning January 1, 2013, the long-term capi- subject. Gather your current realized and unrealized tal gains rate increases to 20% and the short-term gains and losses for the year to date, and schedule an capital gains increases to 39.6%. Unfortunately, you appointment with your income tax advisor. It will likely also have to add onto each base rate another 1.2% to be worth the effort. reflect the return of the 3% disallowance of itemized deductions and an additional 3.8% on investment in- come, including capital gains, for incomes above cer- tain thresholds for the new Medicare tax. Ill stop there, it could get even worse if President Obamas Buffett Rule is passed, which could impose a mini- mum tax rate of 30% on realized long-term capital gains on millionaires. Integrity Traditional year end capital gains tax planning con- templates accelerating losses into the current year Innovation (referred to as tax loss harvesting) and deferring the recognition of gains into next year. Further, where capital loss carryovers exist, taxpayers are generally Character inclined to use them as soon as possible to get the most time value tax benefit. Capital gains tax planning for 2012 requires counter- intuitive thinking. Taxpayers should review their un- realized gain positions on their capital assets and seri- ously consider recognizing (selling) those gains in 2012 to get the benefit of the lower rates. Con- versely, capital losses become more valuable in 2013 when rates increase. So, a viable strategy may be to postpone recognizing capital losses, or capital loss carryovers until 2013 to shelter higher tax rates. Keep in mind that even in 2012, the short-term capi- tal gains rates are still 35%. So, there is nothing wrong with harvesting capital losses or using capi- tal loss carryovers to offset realized short-term capital gains in 2012. A word of caution, dont let common sense get lost in this convoluted process of tax planning. If you hold a stock that is in serious jeopardy of becoming worth-
  • 5. View Capital Advisors, LLC was founded in 2004 by its principals with the mission of providing sophisticated Contributing to this issue: investment asset management and financial and estate planning to our U.S. and Non-U.S. clients. R. Craig Brubaker I. Michael Goodrich We seek to bring wealth planning best practices and a wide range of non-proprietary solutions to our clients. We also conduct our own research and diligence on 2000 McKinney Avenue, Suite 600 world markets and investment alternatives. Dallas, TX 75201 For further information, please contact your investment 214-855-2550 representative or one of our wealth planning specialists: www.view-cap.com R. Craig Brubaker 214-855-2556 cbrubaker@view-cap.com I. Michael Goodrich 214-855-2552 mgoodrich@view-cap.com To ensure compliance with requirements imposed by U.S. Treasury Regulations, View Capital Advisors, LLC, and its affiliates, informs you that any U.S. tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. View Capital Advisors, LLC provides asset allocation and investment advisory services through its affiliated registered invest- ment advisor, View Capital RIA, LP and provides trade execution services through its affiliate, VCA Securities, LP.