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WASHINGTONLike most tax plans, the Bush administration's plan to change the tax treatment of health insurance premiums would result in winners, losers and those not much affected.
How employees fare would depend on their income and the cost of their group health insurance plan.
Under the plan, employees with group health insurance coverage would be entitled to an automatic tax deduction of $15,000 for family coverage and $7,500 for individual coverage.
However, the proposal also would add to employees' taxable income the cost of a health insurance plan in which they have enrolled.
In effect, any tax break would be based on how much lower the cost of the health insurance plan was compared with the $15,000 and $7,500 health insurance premium deduction.
And, if the cost of the plan exceeded $15,000 for family coverage and $7,500 for individual coverage, the difference would be taxed, with the employee paying taxes on the difference and the employer liable for payroll taxes on the difference.
In short, the big winners would be employees covered under low-cost plans and losers would be those covered under high-cost plans. There would be no impact--regardless of income--for employees in plans with costs equal to the deduction amounts.
A few examples illustrate the tax impact--by income level--of the Bush plan.
Take the case of an employee with taxable income of $80,000 and family coverage that costs $10,000. Under current law, based on Internal Revenue Service tax tables for 2006, that individual's income tax would be $13,121.
Assuming the Bush plan was in effect for 2006, the individual's federal income tax liability would be $11,871, a savings of $1,250.
On the other hand, take the example of an employee with taxable income of $40,000 a year, also with family coverage costing $10,000. Under current law, his federal income tax bill would be $5,249. Under the Bush plan, he would face taxes of $4,499, a savings of $750.
But the Bush plan would hike income taxes if the cost of coverage exceeded the $7,500 and $15,000 caps. Assume the employee with a taxable income of $80,000 was covered under a family plan that cost $20,000 a year. The employee's federal income tax would be $14,371, an increase of $1,250.
For the employee with a taxable income of $40,000 and covered under a family plan costing $20,000, the employee's income tax liability would be $5,999, an increase of $750 compared with current law.