Health care reform continues to dominate Congress’ fall agenda but lawmakers also have many other tax bills to address before the end of the year. On the table are bills to extend some popular but temporary tax breaks, estate tax reform and more. It is an ambitious agenda that has some lawmakers predicting that they will be working right up to the end of the year.

Health care reform

Health care reform is predicted to cost in the neighborhood of $1 trillion and lawmakers are looking for ways to pay for it. Some revenue will come from cost savings to Medicare and other federal government programs. Other revenues will be generated by new taxes.

The House Ways and Means Committee approved a gradual surtax on higher-income individuals. The Senate Finance Committee rejected that idea and instead is expected to impose a tax on high-cost health insurance plans. Many lawmakers in the House and Senate also support new limits on health flexible spending arrangements (FSAs) and health savings accounts (HSAs).

One proposal has broad support in both the House and the Senate: mandatory individual health insurance coverage. Individuals who are not covered by employer-provided insurance would be responsible for obtaining coverage on their own. The House is likely to create a public option, similar to Medicare. There is less support for a public option in the Senate. Uninsured individuals would be liable for an additional tax. However, lower income individuals and senior citizens would be exempt.

Health care reform will likely impose new requirements on employers. The House Ways and Means bill includes a new eight percent tax on employers that do not provide health insurance coverage to their employees.  Employer-provided insurance would also have to meet certain minimum requirements. To help small employers, the House Ways and Means bill would allow them to claim new tax credits.

At this time, it is almost impossible to predict what a final health care reform bill will look like or when a bill will pass Congress. House leaders are working on drafting a bill to present to the full House, possibly for a vote in early November. The pace is slower in the Senate. The Senate Finance Committee is expected to continue writing its health care reform bill into October. The full Senate may not vote on a health care reform bill until November or December. If you have any questions about the tax proposals in health care reform, please contact our office.

Estate tax

Effective January 1, 2010, the current federal estate tax is eliminated as the law is now written. Congress actually passed this law in 2001 but delayed abolishing the estate tax until 2010 because of budget calculations. However, this treatment only applies to 2010. After 2010, the estate tax returns and at higher rates than in 2009.

The Obama administration has proposed extending the 2009 estate tax into 2010. This proposal would give Congress more time to make a permanent change. It would also give taxpayers some certainty in their estate planning. Many small business owners would like Congress to abolish the estate tax but this is very unlikely. Taxpayers should anticipate Congress retaining the estate tax; probably at rates similar to those effective for 2009.

Extenders

Every autumn, taxpayers and practitioners question if Congress will extend many popular but temporary tax incentives. Traditionally, Congress has extended them. In fact, they have been extended so many times that many taxpayers think they are permanent. They are not.

Some tax breaks scheduled to expire after 2009 are:

  • Higher education tuition deduction;
  • State and local sales tax deduction;
  • Charitable contributions of IRA proceeds;
  • Teachers’ classroom expense deduction; and the
  • Research tax credit.

Congress could extend these provisions in December or wait until next year and make them retroactive to January 1, 2010. Our office will keep you posted on developments.

Business taxes

The Obama administration has proposed a package of international tax reforms. The proposals, among other things, would reform the business entity classification rules, defer some foreign-source deductions, and limit income shifting through intangible property transfers.  Neither the House nor the Senate has taken up the proposals and it is unclear if they will before year-end.

Also uncertain is a cut in the U.S. corporate tax rate. The U.S. corporate tax rate is the second highest in the industrial world. President Obama has indicated he would support a reduction in the corporate tax rate in exchange for closing unspecified tax loopholes.

Retirement savings

The White House and many members of Congress back new measures to enroll more workers in retirement plans. Several pending bills would require employers to offer retirement plans or enroll their employees in IRAs. Many lawmakers also support automatic enrollment in retirement plans. Employees would automatically be enrolled in a 401(k) or similar plan unless they opt out. These and other retirement-related bills have been referred to various House and Senate committees. They could come up for a vote before 2010.

More proposals

Also on Congress’ fall agenda are:

  • Cap and trade legislation
  • Fiscal Year 2010 IRS budget
  • Energy tax incentives
  • Education tax breaks
  • Alternative minimum tax relief
  • Tax simplification proposals
  • Closing the tax gap
  • Expanded information reporting

Please contact our office if you have any questions about pending legislation.