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BUSH BUDGET: BIGGER SECTION 179, HSA CONTRIBUTIONS

February 07, 2006

The Presdent yesterday released his budget for the federal fiscal year beginning in October 2006. Much of it was telegraphed by the State of the Union address, but the increased Sec. 179 deduction is a bit of a surpise.

Increased Section 179 expensing: President Bush proposes to permanently increase the Section 179 deduction to $200,000 starting in 2007; with it phasing out as equipment purchases exceed $800,000. The deduction is currently $108,000, and it is scheduled to revert to $25,000 in 2008.

It's hard to complain about increased Section 179 deductions, as they do simplify life for taxpayers who don't file financial statements, where depreciation is required. The increased Section 179 is of a piece with the administration's trend to nibble its way towards a Hall-Rabushka type flat tax, where all capital expenditures are expensed and investment income is untaxed.

HEALTH CARE: MORE, BIGGER HSAs.

As promised in the State of the Union speech, the budget has new provisions to encourage wider use of Health Savings Accounts (HSAs). These are IRA-like accounts that must be used in conjunction with high-deductible health insurance. The proposals:

Double break for non-group high-deductible premiums. Individuals buying their own high-deductible health insurance - i.e., individuals with no employer plan - would be allowed a full above-the-line deduction for the premiums AND a 15.3% refundable credit on the premiums paid. The credit is designed to give the individual insurance purchaser the same tax benefit as an employee with coverage through the employer.

Increase maximum HSA deduction to policy out-of-pocket maximum. Current law limits HSA contributions to the lesser of the maximum out-of-pocket costs under the plan or $5,450 ($2,650 for single coverage). The budget proposes to eliminate the dollar limits.

Refundable health premium tax credit for low-income individuals. A limited tax credit of up to 90% of premiums paid on high-deductible health policies would be available to single taxpayers with an AGI of up to $15,000. The credit would be 50% for taxpayers with up to $20,000 AGI, with the benefit phased out between $20,000 and $30,000. The credit would be refundable, which means it would operate as a subsidy. The credit is capped at $1,000 annually.

These items are designed to put individuals without employer coverage on the same tax footing as employees in terms of health care tax benefits. They are also designed to address criticisms that the HSA program is only good for wealthy taxpayers.

While the whole idea of making health care a tax benefit item is probably unwise, it isn't likely to change. That being the case, it makes sense to de-link employment from tax benefits in a world where career changes are the norm. The move to high-deductible arrangement is also wise, as it puts more health spending decisions in the hands of the patient, rather than the insurer. The tax credit for low-income policies should be of some help to young adults starting their careers, but it's benefits will be limited until the states open up their health insurance markets to out-of-state providers.

Research credit: The budget would make the research tax credit permanent. It has been extended on a year-by-year basis.

I believe the research credit should be repealed in exchange for lower rates. I think it is primarily a "harvested" credit that taxpayers claim for things they would do anyway. The IRS is poorly equipped to evaluate whether actual research occurs, and it would be better if they didn't even have to try. Yet if an ill-conceived credit is going to exist, it should be made permanent; poor policy is better than poor policy that has to be re-enacted every year.

Will any of this pass? In the current partisan atmosphere, don't hold your breath.

There's more, but it's all small-ball stuff, like changes in IRS funding, temporary AMT relief, and increased penalties for frivolous returns. You can read more at these links:

Press release summary of budget tax proposals.

"Blue Book" detailing budget tax proposals (pdf).

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