The American Health Care Act, a.k.a. Trumpcare, affects much more than just health insurance. Trumpcare would repeal many provisions of Obamacare that relate to insurance coverage, but it would also substantially change the amount of revenue the federal government collects. In other words, it's not just health insurance reform -- it's tax reform, too.
The Congressional Budget Office estimated that if the version of Trumpcare passed by the U.S. House of Representatives became law, it would reduce revenue by $992 billion. In other words, Trumpcare is effectively a $1 trillion tax cut. The big questions are: Whose taxes are being cut, and what kinds of tax reform are being ushered in by this healthcare bill?
Which taxes is Trumpcare cutting?
Trumpcare would cut taxes largely by repealing many of the taxes put into place by Obamacare to fund the original health insurance law, including:
- Individual-mandate taxes: Obamacare imposes a tax penalty on Americans who do not have qualifying health insurance coverage. The penalty amount is the greater of 2.5% of household income or $695 per adult and $374.50 per child without coverage, up to a maximum of $2,085.
- Employer-mandate taxes: Obamacare also contains an employer mandate that imposes taxes up to $3,390 per full-time worker if larger employers fail to provide affordable, comprehensive insurance coverage. Enforcement of the employer mandate has already been delayed.
- The "high medical bills" tax: Before Obamacare, taxpayers were allowed to deduct healthcare expenses exceeding 7.5% of their adjusted gross income. Obamacare changed the threshold so taxpayers can't deduct health expenses until they spend 10% of their income. This de facto tax increase was dubbed the "high medical bills tax."
- Medicine-cabinet taxes: Obamacare eliminated taxpayers' ability to purchase over-the-counter medications other than insulin with pre-tax funds through a health savings account (HSA) or flexible spending account (FSA). This created another de facto tax increase -- known as the "medicine-cabinet tax" -- because these products must now be bought with after-tax funds.
- Tax increases on HSAs and FSAs: Obamacare increased the penalty on HSA and FSA withdrawals that are spent on anything other than qualifying medical care. Obamacare also put a limit on the amount of pre-tax money taxpayers could put into a flexible spending account.
- Indoor tanning services taxes: Obamacare imposed a 10% tax on indoor tanning services.
- Capital gains taxes: Obamacare imposed a 3.8% tax on capital gains, dividends, and interest income for families earning $250,000 or more.
- Medicare surtaxes: Obamacare charged a 0.9% Medicare surtax on wage income exceeding $200,000 for individuals and $250,000 for couples.
- Medical device taxes: A 2.3% excise tax was imposed on manufacturers and importers of medical devices, although the Consolidated Appropriations Act of 2016 imposed a two-year moratorium on this tax.
- Health-insurance providers' fees: Obamacare imposed an annual fee or tax on health insurance providers, the collection of which has been suspended for 2017 by the Consolidated Appropriations Act of 2016.
- Fees on drug manufacturers and importers: Obamacare imposed an annual fee on manufacturers and importers of brand-name medications.
Trumpcare would not repeal the so-called "Cadillac tax," which is a 40% excise tax on employer-provided health plans with annual premiums exceeding $10,200 for individual coverage or $27,500 for family coverage. Trumpcare would, however, postpone collection of the tax until 2025. That tax was delayed for two years by the Consolidated Appropriations Act of 2016, which was a year-end budget deal reached by federal lawmakers and signed into law by President Obama.
Will you see a tax cut?
Whether your taxes will be reduced depends on how high your income is, whether you have a generous employer-provided health insurance plan, whether you contribute to an HSA or FSA, and what types of healthcare services you use. However, analyses suggest that the wealthiest Americans would likely experience the largest tax cuts under Trumpcare.
By 2022, when all the changes proposed by Trumpcare would become fully effective, households in the lowest income brackets would receive a tax cut of around $150, or 0.9% of their average after-tax income, according to the Tax Policy Center. Middle-class families would see an average tax cut of $300, or 0.5% of after-tax income. Families with incomes in the top 1% of households would experience an average tax cut of $37,000, or 2.1% of income. Finally, the most generous tax cuts would go to families in the top 0.1% percent, with household incomes of $3.9 million or greater; these families would save an average of $207,000 boosting their after-tax incomes by 2.6%.
If you're not in the top 1% of Americans by income, then the best way to maximize your tax breaks under Trumpcare would be to take advantage of the higher contribution limits to health savings accounts (HSAs), which allow you to put aside pre-tax funds to pay healthcare expenses if you have a high-deductible health plan. If your insurance coverage isn't as generous after Trumpcare passes, you may need the extra tax break.
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