Is there any other part of either bill that taxpayers should be aware of?
Part of the Senate plan includes an excise tax on so-called ‘Cadillac plans’ — an excise tax of 40 percent to be levied on insurers that have medical benefits that exceed a certain dollar threshold for covered insureds.
If the cost of a single person’s plan is in excess of $8,500, there will be a 40 percent tax on the excess. For family plans, the 40 percent tax will kick in on anything in excess of $23,000.
While this seems to only apply to insurance companies, the excise tax also extends to self-insured employers. If a medium to large company decides that it wants to self-insure for medical costs, that same 40 percent excise tax applies on the same levels of benefits.
As far as to which plan is ‘better,’ it all depends on where you stand. If you’re making, say, between $500,000 and $700,000 per year in wages or self-employment income, you’ll definitely like the House’s surtax on people making more than $1 million. If you’re making more than $1 million a year in income of any source — including interest, dividends and capital gains income — you’d much rather see the Senate’s version that taxes wages and self-employment income.
Depending on what your source of income is and what your level of income is, you’re going to have a vested interest in one plan over the other.
What, if anything, can taxpayers do to prepare for these changes?
When tax changes are on the horizon, you usually have a fair amount of opportunity to prepare for those changes. But since there are two versions of the bill — each with its own tax on different types of income streams — and no one knows what version will be passed, planning becomes more difficult.
However, if the Senate bill passes, you’ll see many people employ a longstanding technique of avoiding wages and self-employment income. For example, if a small business owner who operates an S Corp makes $1 million in a year and pays himself $1 million in salary, he would be subject to the wages and self-employment surtax.
However, if that same business owner paid himself a more reasonable salary, say $100,000, and took the other $900,000 as distribution on earnings from the S Corp, then he would avoid wage and employment taxation.
If the House bill is enacted, things get tougher. It’s pretty hard to hide from income.
You can do things such as salary deductions to get under $1 million for the year or postpone income where possible, but it’s not likely that anyone would forgo income to avoid an additional 5.4 percent of taxes.
Once you’re over the limit, you’re over, and you’re paying the surtax.
WALTER M. McGRAIL, JD, CPA, is a senior manager at Cendrowski Selecky PC. Reach him at (248) 540-5760 or [email protected].