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A step toward taxing health benefits?

This year's W-2s for some employees show the value of health benefits provided by employers. Is one of the biggest tax breaks out there on the chopping block?

By MSN Money Partner Feb 19, 2013 12:48PM

This post is by Laura Saunders of The Wall Street Journal.

 

Could health benefits be taxed? © Comstock Images, JupiterimagesWhen you examine your W-2 for 2012, pay attention to a surprising new number on the form, especially if you are an upper-income-bracket taxpayer. The figure could threaten one of your most valuable tax breaks.

 

The W-2 is the annual tax form with wage and salary data that employers provide to workers and the Internal Revenue Service. Companies were required to send W-2s by the end of January.

 

The new number appears in Box 12 after the symbol "DD." It shows the cost of your employer-sponsored health plan, if you have one. The number includes the combined amount paid by the company and the employee for coverage, but not worker contributions to flexible spending accounts or health-savings accounts — nor additional co-payments or reimbursements.

 

Companies that prepare 250 or more W-2s have to report this figure to workers for 2012, as do many government agencies and nonprofits. Smaller employers have longer to comply with the requirement.

The new number, mandated by Congress as part of the 2010 health-care overhaul, shines a light on an important but little-understood benefit. In most cases, health-plan costs are "excluded" from income, which means they are tax-free. But most workers have been unaware of how large this benefit is because they haven't seen it on their tax returns.

 

For many people, the health-plan tax break is more valuable than the highly popular mortgage-interest deduction on Schedule A, says Kelly Davis, an employee-benefits specialist at accounting firm CliftonLarsonAllen.

 

For example, the first-year deduction on a $400,000, 30-year mortgage with a fixed rate of 3.75% is $14,874, says Keith Gumbinger, an mortgage analyst at HSH.

In comparison, the average health-insurance premium last year was $16,427 per family at firms with many higher-paid workers (earning $55,000 or more), according to a survey by the Kaiser Family Foundation. In New York City, health insurance can cost $20,000 or more per family.

 

Since 1997, employer-sponsored health care has exceeded the mortgage-interest deduction as Uncle Sam's most costly tax break, according to estimates by the Joint Committee on Taxation. Employer-sponsored health care costs the federal government $145 billion of revenue a year, compared with $93 billion for mortgage interest.

 

Health-plan costs also have risen far more rapidly than inflation. The average price of employer-sponsored family coverage nearly doubled between 2002 and 2012, according to the Kaiser Family Foundation. For the past three years, large-company chief executives surveyed by the Business Roundtable, a trade group, cited the trend as one of the group's largest "cost pressure concerns."

 

The U.S. government hopes putting the cost of health coverage on the W-2 form will "show employees the value of their health-care benefits so they can be more informed consumers," according to the IRS.

 

It definitely will fill in a big blank for lawmakers and tax-policy experts. So far, most health-insurance data has come from surveys, says Roberton Williams, an economist at the nonpartisan Tax Policy Center in Washington, "but now there will be hard data from tax records."

 

The reporting requirement also will put pressure on companies to abide by "antidiscrimination" rules designed to keep the coverage of highly paid executives in line with that of lower-paid workers, Davis says. "Many firms have been unaware of these rules, while some may have ignored them," she says.

 

New taxes on health coverage are a possibility, too. In last year's budget, President Barack Obama proposed capping the value of many tax benefits, including employer-sponsored health plans, at 28% for married couples with more than $250,000 of adjusted gross income, or AGI, or singles with more than $200,000 -- versus the current maximum rate of about 40%.

 

"It's hard to figure out how this would work," Williams says. That is because the 28% cap apparently refers to a bracket of taxable income, which includes itemized deductions. The proposed $250,000/$200,000 limits, by contrast, are tied to AGI, which doesn't include these deductions.

 

So far, employer-provided health benefits are not subject to income tax for most taxpayers. If that changes, it could be a real health scare.

 

More from The Wall Street Journal and MSN Money:

 

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62Comments
Feb 22, 2013 6:02AM
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The funny thing is we loose stuff every year a little at a time and people do not notice
unemployment now taxed
social security now taxed
work deductions removed by making them subject to the over a certain percentage of income trick
medical deductions see above.
Little by little since Reagan all middle class deductions are going away. This is a bipartisan effort folks. Both republicans and democrats are at fault. That said I can't believe how partisan this site is.
Viewpoint are interesting, for example I see Obama phones as a gift to corporate america, sooooo many new customers and taxpayer money for them. Most of you see it as a horrible free givaway to moochers. While we argue about this this they will take our mortgage deductions and health insurance deductions tear up the social safety net and reduce top income rates, and the republicans and democrats will do it together all while keeping all their tax funded benefits and being re-elected.

Feb 20, 2013 11:44PM
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^6 figure plus but enlightened you sound like the typical middle incomer who thinks it is the poor that are robbing them...they sure got you fooled.
Feb 19, 2013 9:24PM
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Yes. I know this article stipulates a above average earned income before this penalty kicks in, but, if the money keeps getting created out of thin air, your in come could approach this threshold while at the same time this could be lowered. No citizen's wealth will be spared from a needy government's taxing authority.
Feb 19, 2013 7:58PM
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It is the REPUGNANTS that want to go after the health benefit because they do not want to raise corporate taxes to Eisenhower levels and they do not want to tax capital gained income like  the 215 million Romney "earned". And if the DEMONCRATS let them do it they stink too.
Feb 19, 2013 7:18PM
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There are tons of scary "revenue possibilities", and while they might seem far-fetched now, they really aren't.

We could see means testing for Roth IRAs where if you make a certain amount of money over your working life, these distributions become taxable.

Several members of Congress, including Pelosi, have publicly discussed the possibility of confiscating all 401k accounts and putting everyone on a gov pension.

We're probably just a few decades away from a nationwide VAT, and this will be in addition to regular income taxes.

There are movements that champion removing all tax deductions for "wealthy" people - no deductions for mortgage interest, charitable contributions, etc...

There have also been talks of taxing people for every mile they drive, or every minute they use a phone. 

Taxing health benefits is just the beginning.

Feb 19, 2013 7:10PM
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It's not just Obama who's out to cut this benefit.  The Republicans have also been talking about taxing it or capping it.  Research some of Paul Ryan's comments.  We're getting it from both sides people.

Feb 19, 2013 5:46PM
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next thing you know, they will require business to add the cost of all the toilet paper the employee uses to the W-2 and tax the employee on it.
Feb 19, 2013 5:33PM
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I worked for the state for 15 years. My employee compensation stated my health insurance cost 547.00 per month. When I went into private business i purchased the same plan from the same company BCBS for 261.00/month. Would I have to pay on the 547.00 figure?  I have a better idea let's cut the estimated 28% of unemployment claims that are fraudulent. Lets cut out Congress health care plan and make them have the same plan I do. Let's cut out the millions in travel spent monthly by the president.. No more paid junkets for congress in Vegas. I could go own but the general idea is cut the waste. Then we don't have a budget problem, and we don't cut services to the people that need them.
Feb 19, 2013 5:32PM
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All you partisan morons posting away fail to understand that you all have elected politicians that have run the US into the ground. Now these legislators have their backs to the fiscal wall; the voter still wants his free stuff, China wants its return on bonds, and the Fed money machine is running low on ink. Enter the lowly tax payer.

 

What is really sad here is that health care reform requires participation and now that conscription may (will at some point) come with a obligatory fee (tax). The problem with this health care "benefit" is that it is truly phantom and for most of us unrecognized income. The only way it ever becomes "income" and pass through at best, is when someone is hurt of ill. I think if this approach succeeds we will be well down the slippery slope to taxing in theoretical space. In business terms this would be the same thing as paying income tax on purchase orders before a service or product is delivered, which in the accounting world is a no-no outside of China.

Feb 19, 2013 5:31PM
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this dude loves to hear his own name, "i'm stacy johnson" "that's right, i'm stacy johnson", "by the way i'm stacy johnson" every video you watch between him saying his name and plugging that website, i've lost 2 minutes. 
Feb 19, 2013 5:28PM
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Obama will find every way possible to fund his OBAMA-CARE. aka. AFFORDABLE HEALTHCARE ACT. Beware, this is only the start of government robbing you blind. The sad thing is, there is very little you can do about it. Thank you very much all of you Obama supporters.
Feb 19, 2013 5:26PM
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Yep ! Along with the mortgage interest deduction they top the list. Just wait until the ACA kicks in completely. The ouch will be heard worldwide.
Feb 19, 2013 5:23PM
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Don't blame me, I voted for Romney.
Feb 19, 2013 5:16PM
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Obama is going to force companies to provide health care to employees, then tax the employee for receiving the "benefit."  This guy is brilliant!
Feb 19, 2013 5:13PM
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this is going to be a compliment to the social security that was once not taxable. you are now taxable on (most) of your social security, the greater part of which was not taken as a deduction. now you will be taxable on your medical even where you did not use. as a small employer, my company pays the health insurance premiums of all employees. the company does receive a deduction. over the past 10 years, employee claims have been less than 52% of premiums. in the worst case, an employee will be paying tax on health insurance with respect to which some never made a material claim. perversely, it may encourage healthy people to drop coverage and create a situation where those who do not take care of themselves will be an even greater burden. i am not sure i understand.
Feb 19, 2013 5:06PM
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.............................Not at all, the IRS doesn't tax, only Congress does.

 

 

Feb 19, 2013 4:58PM
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@THX. You are out of your mind. My Union has worked for decades to get good healthcare at my company.  So I should be penalized because I have a good job, and my benefits don't cost me an arm and a leg?  It's bad enough proposing tax increases for the working class in order to pay for those who have not or cannot get insurance.  Stop penalizing people who are successful to provide for those who aren't.
Feb 19, 2013 4:48PM
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“If your family earns less than $250,000 a year, a quarter million dollars a year, you will not see your taxes increased a single dime. I repeat: not one single dime.” (President Barack Obama, Addeess before a Joint Session of Congress, Washington, DC, 2/24/09)

 

Our payroll taxes already went up 2% this year, now they are going to tax insurance benefits?

 

Gasp - I didn't see this coming!  You mean our President t is actually lying to us poor taxpaying citizens?  We can't be that stupid can we?  (rhetorical question)  

 

 

 

 

 

Feb 19, 2013 4:42PM
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So this is a totally speculative article and the President has not proposed this therefore the haters come on out.  The fact of the matter is that people in the United States need to realize that Health Insurance is a tax and they are not aware of the total tax.  If they became aware just how much Health Insurance plus out of pocket expenses cost each year in our country maybe they would start to realize that although Obamacare is an improvement it is just the start.  We need to get off of employer based healthcare and move to a not for profit single payer universal healthcare system.

People hate taxes, but are perfectly OK with having someone with a 7-8 figure benefits package with a private corner office with private bathroom with gold fixtures raising insurance prices. Yet they would have a fit if Medicare tax was raised to provide Medicare for all at a much lower price and then required an act of congress to raise the tax.
Feb 19, 2013 4:37PM
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It is about time that they tax benefits as income.  Just another way for people to cheat the system by hiding income.  Going to love to see what congress' healthcare benefits cost.  I know guys that make $40,000 a years and have $30,000 in untaxed benefits like health care, dental, vision, disability insurances, discount plans, life insurance, death benefits, tuition reimbursement and more.

 

 

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