Government, Health Care, Retirement, Taxes 
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State of the Union: Health insurance, tax breaks & Social Security

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On Tuesday, during the President’s State of the Union address, President Bush is going to be discussing, among other things, three items that relate to some of the issues often discussed on personal finance blogs. Just wanted to give a heads up in case you were planning on watching the State of the Union and wanted a score card.

Health insurance deduction

In an attempt to help more Americans obtain health insurance, the President will propose a plan in which each citizen will be able to deduct $7,500 ($15,000 for families) from their taxes and employer paid medical insurance will become taxable. What this means is that everyone who doesn’t get insurance help from their employer will get that help from the government and everyone who does will now pay taxes (if their benefit exceeds the deduction) on what is now a tax-free benefit. Personally, while I may find myself owing a little more in taxes, I think it’s better for the country as a whole to have more individuals covered by medical insurance.

Making tax breaks permanent

President Bush would like to make permanent those tax breaks currently set to expire in 2010 such as the lower rates on income tax, capital gains, and dividends. I think that some of those breaks unnecessarily benefit the wealthy (not many low income earners find themselves investing in stocks, they’re investing more in groceries).

Social security shortfall… your poor ugly stepsister/brother

While there were no hints as to what they were going to do, apparently the President will ask Congress to work with him to try to solve the shortfall issue – though Democrats have called his individual accounts plan a “non-starter.”

Source: CNN Money

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14 Responses to “State of the Union: Health insurance, tax breaks & Social Security”

  1. CK says:

    I received my yearly SS update this past weekend. I took a look at the fantasy numbers the Gov. had projected for me for 40 yrs from now and promptly put it in the circular file. How about they save some money and stop printing such a waste of paper.

  2. jim says:

    You should put it in the circular recycling file. :)

  3. Dus10 says:

    There is a lot more to this than what is explained.

    Health Insurance Deduction
    This does a couple of things. First, it makes healthcare insurance more affordable for those who do not purchase it. Currently, you can only write off costs for such things in the amount that exceed about 7% of your AGI, and then it is itemized, which creates another dependency and set of conditions. Now, everyone can write off a certain amount.

    Now, making the employer paid benefits taxable may seem crazy, but there is a definite method to the madness. First of all, you will be able to deduct the same amount as everyone else, so it isn’t so bad. And second of all, it places a premium on these “buffet” style plans and will encourage employees and employers to look at high-deductible plans coupled with HSAs. This is the real reason for all of this legislation.

    Making Tax Breaks Permanent
    This benefits every income earning American, plain and simple. Further, the lower capital gains taxes do not help the wealthy… they stop punishing them. Look at how corporations work: They make money, they spend it, then they pay taxes… after that, profits are distributed to shareholders, and then it is taxed again. The lowering of the capital gains taxes help to minimize the effects of double-taxation. And sure, it is nice for the wealthy, but it will also help those who are not so wealthy who may have not really wanted to invest in stocks because of the taxes. Further, the lowest tax bracket is 10%, and it is part of these breaks… if they don’t become permanent, then the lowest bracket will become higher.

    Social Security…
    Eh, I doubt we will get anything meaningful out of this… when the Democratic front-runner for 2008 applauds at failure for political gain, we have problems (hint: Hillary Clinton at the last State of the Union Address). I say let it go bust… I don’t even care anymore. Everyone start preparing better for your future and if it tanks, maybe we can just scrap the whole thing.

  4. I don’t see how a deduction will help the uninsured become insured. It’s only a deduction, not a refundable tax credit, right? If the uninsured as a whole have low income, a deduction is not worth much to them because they don’t pay much tax anyway. If health insurance still costs $1,000 a month, those who can’t afford it now still won’t be able to afford it even with a 10% break from tax deduction.

  5. nelson says:

    From another point of view, would the ability to deduct a fixed amount for health care entice healthier people to leave their employer’s health care plan to find a cheaper plan? I haven’t seen a doctor in about 8 years and I don’t need any medications, so, essentially, I’m a contributor to the pool. If all people like me saw the advantage to minimal health care coverage and a good tax break and left their employer’s plan for some cheaper plan (if it exists), wouldn’t that create a health care pool full of mostly non-healthy people (people who make claims) and drive up the employer’s plan’s premium? And doesn’t that go against what usually keeps health care coverage (somewhat) inexpensive…everyone contributes to the pool with the idea that only a certain few will withdraw from it?

    There are lots of hypotheticals to that example…but it’s something to look into.

  6. CF says:

    IMO, this health insurance deduction isn’t about helping the uninsured get insured. A deduction is just a deduction – it doesn’t guarantee that the individual will purchase heath insurance with the untaxed income. This idea is masqueraded the real reason for the plan – it will serve as an incentive for the middle class to drop down to a higher deductible, thereby reducing the amount of $ the corporatation is forking over. Sure the employer-paid portion is now taxed, but the overall corporate expense will be less.
    Plain and simple, this will not help the uninsured get insured.

  7. CF says:

    Let me clarify an additional detail, under the new health insurance deduction plan,
    Bush is proposing to make health insurance premiums taxable income, with people who get employer-provided plans that cost more than $15,000 a year facing a tax hike if they do not get cheaper insurance, the White House said. Average family coverage offered by employers costs about $11,500 annually.

    The president is proposing tax deductions — $15,000 for a family and $7,500 for an individual whether or not they purchase their own health coverage or get it from their job — to help buy insurance. …

    …about 30 million Americans could face higher taxes under the president’s plan “if they didn’t change their behavior”source

  8. Dus10 says:

    The Finance Buff,

    We are currently in a downward spiral where healthcare insurance keeps increasing, and more people are becoming uninsured. It’s not like everyone who “cannot afford” insurance is 80% away from affording it… there are people who are on the edge… and this will keep them from deviating further.

    Also, there are high-deductible plans out there that people cannot even write off, at this point, because it doesn’t exceed 7% of their AGI… and they aren’t likely to be itemizing anyhow.

    As with all of our national issues, we got into this problem one step at a time… we cannot fix it by going the same direction (helping those most in need first)… we have to turn around and start making it more affordable for those who are almost there… and once that happens it can keep becoming more affordable.

    Nelson,

    The ultimate goal is to provide a culture that favors high-deductible plans tied to HSAs. If people see a pool of money in an HSA that they own, they will become more involved in their healthcare choices. The high-deductible plans have actually become cheaper, as opposed to the standard buffet-style plans out there… it is counter to what is happening, and it is the direction that makes the most sense.

  9. Dus10 says:

    CF,

    You are right about the primary motivation… but it is not because businesses will end up having a lesser bill. These plans are tied to HSAs. The trend has been that the employers contribute the lion’s share to the HSAs on behalf of the employees, and the employees can contribute more, if they like. The HSA contributions will still remain untaxed, as they currently are (like FSAs and HRAs).

    Now, the employer will see a reduced expense because the price of high-deductible plans is decreasing. So, in the end, insurance will become less expensive, and employees and employers will see benefits.

  10. @Dus10: re: capital gains taxes…”…And sure, it is nice for the wealthy, but it will also help those who are not so wealthy who may have not really wanted to invest in stocks because of the taxes.”

    Are you trying to imply that the “not so wealthy” are really not investing in the stock market – not because they need the money to buy food or clothes for their kids – but, because they are worried about having to pay taxes? You sound like you are very far removed from the real plight of people who cannot afford to invest (read: save) because they need every dollar of every paycheck to pay for their daily living expenses.

    By removing this tax from the so-called wealthy, you are shifting more of the burden of the national budget to these “not so wealthy.”

  11. Livid Labor says:

    This new healthcare plan really sticks it to labor. I am a union electrician and as part of each member of my local pays over $10 per hour worked as part of our health and welfare package. This is steep, but our coverage is top-notch. This rate is so high because the insurer can’t turn anyone away in our group plan, thus a guy with six kids with health problems pays the same as I do, a single healthy young man. I don’t really have a problem with this aspect as I might have a family of my own in a few years and the amount I pay will be more in line with what I get out of the program. My problem lays with the taxation aspect of this ill conceived plan. If I work 1,750 hours this year that rough equals $17,500 paid into my health care. I get screwed and the government counts $10,000 of that as taxable income. Income I never see and at this time in my life the only benefit I get out of it is my yearly eye exam and contacts.

    Even if I had a family I would still be left with $2,500 of new taxable income.

  12. CF says:

    Corporations will absolutely have a lesser bill if the majority of their low-deduction-high-premium employees switch to high-deduction-low-premium HSA coverages. While they may match HSA contributions, that expense is a fraction of the prior premium expense.
    In this plan:
    Middle class family with the national average 2.5 children will be less off. They are incented/forced to move to lower premium plans, paying more out of pocket in effect.
    Upper-class families will less off but the impact will be minimal since they can afford it.
    Lower class paycheck-to-paycheck (no savings) familys probably won’t be affected, even though they’re the “primary target”, b/c they’re already uninsured and a simple tax deduction as incentive to get insured won’t to the trick.
    Corporations are the only clear winner in this plan.

  13. moominoid says:

    I figure I’ll gain about $1500 per year from the health insurance deduction as my health insurance is exactly half the $7500 limit. I think actually the corporation tax should be abolished and regular rates applied to dividends. Then there should be inflation indexing applied to all capital gains and losses. The lower rates on dividends and long-term gains are half assed ways of achieving this…

  14. Diana says:

    Bush is such a moron. Now that we can finally afford a home, and we work for one of the few companies that give us full benefits (paid vacations, health insurances including dental and vision, etc), WE have to be taxed for it? This will make companies like my husband’s less likely to keep this good insurance because people will complain about it. My husband’s coworkers aren’t smart enough to know it yet, but they will when it comes time for the taxman to visit. Another idiotic Bush idea, thanks Mr. Fool Me Once…


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