The Hidden Tax of the Affordable Care Act

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Maybe we didn't look close enough.

As of now, we still have the Affordable Care Act (AKA Obamacare). The Supreme Court upheld it, and most likely it is going to be a long-term reality. Let’s get used to it.

Now that we are passed the politics, we must look deeper. Healthcare does not pay for itself, so buried deep within the legislation (here, to be exact, or more specifically, H. R. 4872—33 Chapter 2A, Sec. 1411) is a bump in the taxes for earned income, and a 3.8% Medicare contribution tax on unearned income.

What it means:

• Starting in 2013, high-income individuals will pay another 0.9 percentage points on earned income over $200,000 ($250,000 if married). The current rate is 2.9%.
• Starting in 2012, those same individuals, estates, and trusts will pay a 3.8% Medicare contribution tax on UNearned income above the same threshold amounts.

Analysis:

You can get stuck with both, or one or the other. If you’re an individual taxpayer, the tax is 3.8 % of the lesser of the excess of modified adjusted gross income over the $200k/$250k threshold amounts, or net investment income.

For estates and trusts, the tax is 3.8% of the lesser of excess of adjusted gross income over the highest income tax bracket for an estate/trust or the undistributed net investment income.

Confusing? It is. Just know if you make over $200k or $250k jointly, and have investments, you’re gonna pay more than you would have this year.

This may seem like it will only affect the wealthy, but it is much more broadly reaching than that. Say you normally make $100k, and your spouse $100k. Good, right? What if you sell your house? What if you  sell some stocks, or have a good year with rental properties?

The UNearned (capitalized for hyperbole) income tax hits on more things than you think. The tax covers  nonbusiness income from dividends, royalties, rents, and interest, except municipal-bond interest; short- and long-term capital gains (think stocks, sales of land, etc.); the taxable portion of annuity payments; income from the sale of a principal home above the $250,000/$500,000 exclusion; a net gain from the sale of a second home; and passive income from real estate and investments in which a taxpayer doesn't materially participate, such as a partnership.

That is a really comprehensive list.

Examples:

Let’s try some examples.

1. Example: A married couple filing jointly has $400k of adjusted gross income--$240k of wages plus $160k of investment income composed of interest, dividends and net gains from the sale of real estate. Because they have $150k of investment income above the $250k threshold, they would owe an extra 3.8% of that amount, or $5,700, in tax.
2. Example: A trust with a $100k of undistributed net investment income would pay the 3.8 percent surtax on $88k as this amount that exceeds the threshold amount of $12k, yielding $3,344 in surtax.
3.  Example: A trust has $50k in net investment income and needs to make $60k in distributions. The trust has two beneficiaries, poor guy and rich guy. Rich guy will get tagged with the extra tax, poor guy will not. One way to beat the system is distribute more out to poor guy, assuming both parties agree, and prevent the tax hit.

Take away:

We are in a deficit. We have a multitude of government entitlement programs, welfare systems, new healthcare initiatives, and are paying for wars on multiple fronts in the wake of an extended global recession, the likes not seen since the big one. Taxes are going to go up, they just have to unless something crazy happens. This is one of the taxes that will go up. It is a tough one, but it does not mean you cannot minimize the impact it has on your bottom line.

Medicaid and Medicare: A Basic Primer and Asset Protection Strategies

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No author cited.

What, exactly, is Medicaid?

• Medicaid is the name of a joint federal and state needs-based health care program. Medicaid was designed to help the needy have a means of health care coverage, and it also provides assistance with long-term care and nursing home stays.

What, exactly, is Medicare?

• Medicare is a federal health insurance entitlement program for those 65 and over (with a few exceptions for the disabled and seriously ill) that is funded through taxes and payroll deductions, and provides coverage for doctors visits, outpatient services, and even prescription drugs. It will not, however, pay for nursing home stays past 100 days.

Why, exactly, do I care about any of this?

Hopefully, you and all your loved ones will live long, full, healthy, fully independent lives and never have to pay out-of-pocket expenses for care or medical issues, and never require assistance outside the family unit until your ultimate demise. Sadly, for most people, this is not the case. Be it a serious disability, illness, or lack of loved ones with the time, expertise, and patience to care for the elderly members of our families, taking care of a growing elderly population is a serious issue.  And it is expensive. Really expensive.

Without getting into the politics of Medi-anything, or debating if it will be there in ten years, lets just talk about the problems that can arise. The main issue clients find is that it can be difficult to qualify for Medicaid. The best thing you can do is to plan, starting yesterday. So start now.

Medicaid Planning.

Elderly people fall into 3 categories: rich enough not to worry, moderate means enough to easily qualify, and everybody else. Most of us fall into the latter of the two categories. Lets start at the top.

Rich enough not to worry:  Assuming you have $1 million or more in assets, you are probably safe to not worry about medicaid. You could give all your money away and qualify for medicaid, but why? You could pay for long-term care insurance, but it is really expensive. You could give some money away, and have medicaid as a backup plan. Still probably not worth it, but it could be prudent. Enjoy your golden years. If you get really sick, then lets talk.

Moderate Means: You still likely will be above the limits, but planning will not be difficult. Get someone qualified to help you though, you can always find ways to save a few dollars than don't have to be thrown away. Read on.

Everybody Else: To qualify for medicaid, there are two tests: the asset test and the income test. If you bust on either, you don't get qualified. The limits are exceptionally low: $2,094 a month in income, and $2,000 in assets. Think you can game the system?  You can, sort of, but the ways to do it are getting more difficult, and the government knows about all of them, so its not really gaming the system anymore. I'll explain.

Income: If you make more than $2,094 a month, you can set up a "Miller Trust" or a Qualified Income Trust (QIT). This is a trust that you sign over  all your social security and pensions and annuities over to, and everything in excess of the $2,094 limit stays in there. The kicker is that when the Medicaid recipient passes away, whatever is left in the trust goes to pay back the government for footing the bill. It is a bummer, but its fair.

Assets: Easy, just give it all away, right? You can trust your kids to use the money to take care of you. Not so fast. The government caught on to this one quickly, and set up penalty periods or "look back" periods of 6 months, a year, and now 5 years. When applying for Medicaid, you have to disclose any gifts made over the last 5 YEARS. That is significant, and why you must plan early. If you can get it out of your name before you need to qualify, great. But you better hope you trust your kids, or whomever you decide to park the money with. Remember, insurance policies (cash value), retirement funds, land that is not your primary residence, all counts against you.

How it works: You disclose everything you have given away on the application, and they divide the number by $142.92. The resulting number is the number of days you will be "penalized" and not allowed to start your medicaid eligibility. They used to do it by the month, now its by the day. The number comes from the average cost of a private care facility.

For some, this is fine. Get it out anyway you can. Better to the kids than the government. For others, this won't fly. You need care now. Medicaid counts certain assets as exempt: your house (if you truly are going to try and return home), a car, household furnishings, and you can pay loved ones for the time they spend taking care of you. $80,000 over the limit? Go buy a Porsche. Why not? You earned it. I foresee the day when there will be hard limits, but everytime I talk with the medicaid caseworkers, they still assure me they are not denying coverage to Porsche owners.  Or fix your roof, and add on a gameroom. This will not penalize you. If you are married, there are special exemptions for your spouse as well. It is tricky, but there are ways to let your spouse (assuming they do not need to qualify) to retain significant assets and income. This is high-level stuff, so talk to an attorney.

Ok, we are ready to apply. You have reduced your income and assets. You get qualified. You can rest soundly knowing that your Porsche and your house will go to the kids. Wrong.

On March 1, 2005, Texas enacted the Medicaid Estate Recovery Program, or MERP. Read more about it here. What this means is that if you die and Medicaid had to pay your bills, they are going to bill your estate. If you have more than $10,000 in your estate, they can make a claim. What's left? That's right, your house. And Porsche. They got on you the back end. There is a way around this, for now.

In the past, you were limited to gifting your house and car away, or placing them in a special trust. Now, the Department of Health and Human Services has officially recognized a special type of deed called a "Ladybird Deed," or more commonly an Enhanced Life Estate Deed. Allegedly named after the former first lady (debatable), the enhanced life estate deed is essentially a Payable on Death designation for your home similar to what you can use on a bank account. You keep everything like it is: you live there, you own it, you can sell it, you can swap it, but if and when you die, it goes to someone else.

Why? If the house is not in your name anymore, and it is not, as the LadyBird Deed transferred it at the second of your death, it is not in your estate. IF it is not in your estate, then the Texas MERP program cannot go after it to pay your debts. There is a similar process for your vehicle as well. Now you keep what was yours.

Your estate will still likely get a letter from MERP, but you just kindly write them back and tell them there is not anything there. Sorry, MERP.

Take away:

Medicaid and Medicare can be good things. They can help you when you need it. They are not for everyone, and they were not designed to be. It can be difficult to qualify for Medicaid, but it is doable. There are also ways to qualify without spending yourself under the poverty line. This, however, is difficult, so get the best help you can. It is money well spent.  

Supreme Court Rules on Obamacare.

What happened: Today, in a 5-4 ruling, the Supreme Court upheld the Affordable Care Act (also known as "Obamacare," as the President was the champion behind a nationalized healthcare plan).

How they did it: Chief Justice John Roberts was the deciding swing vote. Normally a conservative, he authored the opinion and sided with the traditional liberals on the court (Ginsburg, Breyer, Kagan, and Sotomayor) in calling the law a valid use of the taxing power of Congress (Art. 1, Sec. 8, clause 1), and not an abuse of the commerce clause  (Art 1. Sec. 8, clause 3) of the constitution. The traditional conservatives (Kennedy, Scalia, Thomas, and Alito) dissented, not buying the tax argument, saying the majority essentially re-wrote the law in order to uphold it.

The key language in the 193 page opinion, found here, on page 44:

"The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness. "

What this means: The nuts and bolts of the law are: If you don't have healthcare, you better get it. We (the government) will help, by expanding federal programs like Medicare and Medicaid,  and trying to make private healthcare cheaper. If you don't want to or don't get insurance, you have to pay a fine/tax.

What this really means: Great question. Its up to you, America. Re-elect the President, and it will likely stand. Romney has already said he will repeal it, before today and again, today. The states, who likely have final say, have been very mixed in their reactions up to now, with some already providing their own versions of the plan (like California and Colorado), and others violently opposed to it (like Texas.)

Here at home, the numbers are (according to the AP) 25% of Texans are uninsured, which translates to roughly 6.2 million folks. Texas has not implemented an insurance exchange, which is the general precursor to implementing the program, and governor Perry, not surprisingly, is opposed, claiming Texas can "deliver health care more efficiently, more effectively and cheaper than the federal government."

My Take: I get the tax argument, sort of, but as the opponents of the law have argued, this really is a commerce issue, and it allows the legislature to force the people into buying a product. This product is healthcare, but it could also be broccoli. Judge Roger Vinson of the U.S. District Court for the Northern District of Florida, who, on January 31, 2011, ruled that ObamaCare was unconstitutional, argued that if Congress can find good reasons to make us buy health insurance, it can find good reasons to make us “buy and consume broccoli at regular intervals, not only because the required purchases will positively impact interstate commerce, but also because people who eat healthier tend to be healthier, and are thus more productive and put less of a strain on the health care system.” This is why they argued it as a tax.

Starting to make sense? I don't envision a nation of mandatory broccoli purchases, so this is a bit far-fetched, but it is a concern. On the flip side, I am not opposed to healthcare for all, but at a time of unprecedented national debt levels and in the midst of a recession (I'm not buying the "we are recovering" arguments, just yet) I do not know where the money to pay for it will come from, and I certainly don't want to pay for it myself.

Another way to look at it is the court punted: they didn't say if it was good or bad, they just called it a tax, and indirectly asked the American people to decide if they wanted the law based on who they elect in November. Will more insured people make insurance cheaper? Will expanding prescription coverage for medicare users make insurance cheaper? Will not being able to deny coverage for pre-existing conditions make insurance cheaper? I don't really see how, but if you fall into any of these categories, its a win for you.

As an elder law/Medicaid attorney, I guess it gives me the opportunity for a few more clients. If you have elderly family members who do not have healthcare coverage, its time to start talking and thinking about their long-term care. Talk to someone who can help them take advantage of the programs that are out there, and the new ones that today's ruling (might) create.

Common Carriers, Eminent Domain, and Pipelines

In Texas, we have pipelines. Lots of them.  Normally, the process works like this to put them in the ground:

Big Company wants to lay a pipe. They come ask your permission, and offer to pay you for your trouble. You can accept, haggle, or say no. However, no doesn't always mean the company will take no for an answer.

Enter eminent domain. Eminent domain is the power of the government to buy your land from you, even if you say no. The best examples are highways, railroads, and utilities, like pipelines. Is it "fair?" Sometimes no, but we all like highways, railroads, and utilities, so we deal with it as a society. And normally, there are appeals processes and ways to make sure you get what you are due.

Normally, it is difficult for a private company to be awarded this power. It is usually reserved to the federal government, states, and municipalities. And pipeline companies. 


The first successful challenge of a pipeline companies unfettered right to claim "common carrier" status is  Texas Rice Land Partners Ltd. v. Denbury Green Pipeline-Texas LLC (No. 09-0901). Until recently, all a pipeline company had to do was check a box on a form, and they could condemn your land.  Some pipelines are legitimately used for a public purpose, or as "common carriers" defined per the Texas Natural Resources Code (Section 111.002(6)) as a company that “owns, operates, or manages, wholly or partially, pipelines for the transportation...to or for the public for hire...” This is fine.  However, other companies have used and abused this process when it was convenient for them. 


The tricky part is that the pipeline in the case was a CO2 pipe. The Texas oil and gas industry tried to get the case re-heard to clarify the perceived "bad law," in their favor but that attempt was denied. Will the ruling apply to other types of pipelines? The ruling itself makes reference to an oil and gas pipeline in a hypothetical. I think it is clear that the Supreme Court meant "all" pipelines, but it will probably require more litigation to hash that out. 


I think this is the correct ruling. I've tried to tangle with the Texas Railroad Commission before (the entity that approves pipeline paperwork), and, although helpful, they are simple a ministerial agency, not an investigative one. The Denbury case provides landowners a review process that was simply not available before. 


What will this mean? Some are already challenging the Keystone XL pipeline relying on the Denbury decision. For others, maybe your family farm or backyard is in the path of a proposed pipeline. If you or someone you know is dealing with a pipeline company who wishes to cross your land, consult an attorney who knows the law and how to protect your interests. 


I've worked for a pipeline company, and I've negotiated against one. There is a middle ground to be had, that is fair to all parties. The Denbury case helps the landowner get there a little easier. 

Tax incentives for Zombies

In light of the alleged LSD overdose/Hannibal Lecter/Miami Zombie attack, it is time to talk seriously about the undead.

As any good boy scout will tell you, the motto is "Be Prepared." After I read McCarthy's "The Road," I started thinking a little harder about the "what ifs."  While some people take this to a whole new level, millions are being spent on the fascination with the apocalypse, zombies, killing zombies, societal breakdowns, and just about any other scenario where you are going to need to run and hide and fight for your life.  

New to the subject? Here is a decent primer video on the basics of the zombie fascination.

If you haven't seen zombieland, do. It is well written, funny, and has Woody Harrelson at his finest. I also love the Resident Evil movies, but they are not necessarily for the casual fan.  I digress.

 Zombies have become the most sensationalized of scenarios for when society breaks down, lawlessness ensues, and it will be every-person-for-themselves in a post-apocalyptic wasteland. A dose of the supernatural never hurts, either.

This is not, however, a zombie blog, it is a legal and tax blog.


Enter Adam Chodorow , faculty at Arizona State University, and his recent article DEATH AND TAXES…AND ZOMBIES. If you have the time, read it. It is well written, thoughtful, and entertaining scholarship. He blends everything from The Walking Dead to the estate tax to Harry Potter, with a dose of Weekend at Bernies. The Bible and The Princess Bride even makes an appearance in the footnotes. The article discusses topics such as the definition of death, what qualifies, and how various taxes apply to, well, zombies and their variants. This is what all law review articles should strive to be.

One of my favorite passages:

"For instance, if someone who becomes a zombie is considered not dead (as opposed to undead) for estate and income tax purposes, neither the estate tax nor the basis reset would
be triggered. We would be in a situation similar to the one Congress negotiated as part of the Bush tax cuts, which relaxed the basis reset rules in conjunction with eliminating the estate tax.

Alternately, both the estate tax and basis reset could kick in only when a person’s zombie was dispatched. Were this the rule, people might have incentives to become zombies to delay the application of the estate tax."

Pure gold.

Kidding aside, my take away is that with ever changing definitions of life, death, function, and capacity, planning for the unexpected cannot be taken lightly. If you have a will that said "I leave everything to my family," that you wrote in 1984, does "family" mean the same thing to you now? Definitions change. Make sure you change with the times.

Just like planning for the apocalypse, every detail counts. If you have not made a plan, do it. If you have a plan, review it, and make sure it is up to date.

Remember rule #31, always check the back seat. Be careful out there.



Update: Zombies attacked colonial Williamsburg over the weekend. This is getting silly.