O.K., I admit it, I am often the cobbler whose children have no shoes, a lawyer whose practice includes tax work e-filing his tax return at that last moment on October 15, the extended deadline for filing your 2011 tax returns.
The process revealed just how demanding the 2011 calendar year was compared to the 2010 calendar year.
One of the painful items wasn't actually tax related at all. In 2010, I was receiving COBRA coverage from a former big law firm employer that laid off everyone in my regional office including me a while back. In most of 2011, I was receiving group of one health insurance coverage through the Colorado Bar Association which is actually a pretty good deal compared to some of the alternatives. My deductible increased by about $4,000 a year, but the coverage was otherwise more or less identical and was provided by the same company with no changes in providers. My premium increased by $3,020 from 2010 to 2011 mostly because I went from being part of a large group to being part of a "group of one." The change in deductible made little difference in 2011 when my family's out of pocket health insurance expenses were unexceptional, but will make a huge difference this year since two weeks ago, I got back surgery for a squished disk complete with an MRI, another bit of specialized radiology, a neurosurgeon and an anethesiologist. Basically, my cost of health care went up by about $3,000 from 2010 to 2011 and by an additional $4,700 from 2011 to 2012 between further premium increases and larger out of pocket health care expenses, for precisely the same level of care from precisely the same providers. Ouch!
But, it gets worse. In 2010, the federal income tax finally treated the health insurance expenses of self-employed people like myself the same way it treats wage and salary earnings. The health insurance expenses of self-employed people were deducted before computing self-employment taxes, before computing tax credits, and before considering income for any other purpose.
In 2011, the federal income tax law reverted to the old rule, computing self-employment taxes based on before health insurance expenses rather than after. A random $800 tax credit called the Making Work Pay Credit present in 2010 was absent in 2011, and a number of other less notable provisions were also modified (the self-employment and FICA tax rates were actually lowered by two percentage points for 2011 without a change in the self-employment tax base, although the self-employment and FICA tax rates will go up to a rate higher than it started at in 2013).
I actually started calculating my 2011 taxes under the 2010 rules using last year's return as a model, and then recalculated my taxes for 2011 taxes under the 2011 tax laws that actually apply. Bottom line, my taxes under the 2011 tax laws were about $3,300 higher than under the 2010 tax laws, something that I hadn't expected because I've had other things on my mind that the annual round of tax law changes. This in turn, meant that I hadn't paid enough estimated taxes and owe a modest penalty for not paying enough by April 17 of this year. Double ouch!
Between health care premium increases and federal tax increases between 2010 and 2011, I am about $6,300 worse off (ignoring penalties for failing to pay sufficient estimated taxes) than I would have been had the 2010 tax laws and health insurance premiums been in place and everything else in my life, from law practice revenues to business expenses to everything else in life, had been exactly the same. The gap due to health care and federal taxes alone for me, between 2010 and 2012 will be something on the order of $12,000, all other things being equal.
This is enough to dampen anyone's recovery, and before the health insurance company and IRS stepped in, 2011 had been looking much better than 2010. Even with those setbacks, one year further removed from the financial crisis (which hit lawyers with practices like mine very hard), I was still clearly better off by a large margin, but it was a two steps forward and one step back situation that I could do nothing about.
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