May 26, 2010

How Does the Health Care Reform Bill Interact with the Bush Tax Cuts?

The health care reform bill passed in 2010 is not significantly related to the expiration of the Bush tax cuts. The tax provisions in the health care reform bill are mostly outside the individual income tax with the exception of the provision to scale back the use of the itemized deduction for medical expenditures (from a threshold of 7.5 percent of AGI to 10 percent of AGI). That provision of the health care bill directly interacts with provisions in the Bush tax cuts: the increasing of tax rates and the PEP/Pease provisions, as well as with President Obama’s proposed additional limitation on itemized deductions.

Other provisions of the health care bill will interact with the Bush tax cuts in an indirect manner. For example, the new Medicare tax increases in the health care bill on high-income taxpayers will shrink the tax base somewhat, which will affect the revenue that would be raised from the expiration of the Bush tax cuts.

The health care bill does contain a number of tax increases and other revenue raises which phase in over the next few years. Significantly, new Medicare payroll taxes on wages and investment income for high income people are set to take effect in 2013, the same time that many tax cuts could potentially expire if nothing is done. To estimate how these new taxes could affect you, visit our health care tax calculator.