Tax changes affecting individuals in the 2010 health
reform legislation
Hello,
I'm writing to give you a brief
overview of the key tax changes affecting individuals in the recently
enacted health reform legislation. Please call our office for details
of how the new changes may affect your specific situation.
Individual mandate. The new law contains an "individual
mandate"-a requirement that U.S. citizens and legal residents have
qualifying health coverage or be subject to a tax penalty. Under the
new law, those without qualifying health coverage will pay a tax
penalty of the greater of: (a) $695 per year, up to a maximum of three
times that amount ($2,085) per family, or (b) 2.5% of household income
over the threshold amount of income required for income tax return
filing. The penalty will be phased in according to the following schedule:
$95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of
taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of
taxable income in 2016. Beginning after 2016, the penalty will be
increased annually by a cost-of-living adjustment. Exemptions will be
granted for financial hardship, religious objections, American Indians,
those without coverage for less than three months, aliens not lawfully
present in the U.S., incarcerated individuals, those for whom the
lowest cost plan option exceeds 8% of household income, those with
incomes below the tax filing threshold (in 2010 the threshold for
taxpayers under age 65 is $9,350 for singles and $18,700 for couples),
and those residing outside of the U.S.
Premium assistance tax credits
for purchasing health insurance. The centerpiece of the health care legislation is its
provision of tax credits to low and middle income individuals and
families for the purchase of health insurance. For tax years ending
after 2013, the new law creates a refundable tax credit (the
"premium assistance credit") for eligible individuals and
families who purchase health insurance through an Exchange. The premium
assistance credit, which is refundable and payable in advance directly
to the insurer, subsidizes the purchase of certain health insurance
plans through an Exchange. Under the provision, an eligible individual
enrolls in a plan offered through an Exchange and reports his or her
income to the Exchange. Based on the information provided to the
Exchange, the individual receives a premium assistance credit based on
income and IRS pays the premium assistance credit amount directly to
the insurance plan in which the individual is enrolled. The individual
then pays to the plan in which he or she is enrolled the dollar
difference between the premium assistance credit amount and the total
premium charged for the plan. For employed individuals who purchase
health insurance through an Exchange, the premium payments are made
through payroll deductions.
The premium assistance credit
will be available for individuals and families with incomes up to 400%
of the federal poverty level ($43,320 for an individual or $88,200 for
a family of four, using 2009 poverty level figures) that are not
eligible for Medicaid, employer sponsored insurance, or other
acceptable coverage. The credits will be available on a sliding scale
basis. The amount of the credit will be based on the percentage of
income the cost of premiums represents, rising from 2% of income for
those at 100% of the federal poverty level for the family size involved
to 9.5% of income for those at 400% of the federal poverty level for
the family size involved.
Higher Medicare taxes on
high-income taxpayers. High-income taxpayers will be hit with a double whammy: a
tax increase on wages and a new levy on investments.
Higher Medicare payroll tax on
wages. The Medicare payroll tax is
the primary source of financing for Medicare's hospital insurance trust
fund, which pays hospital bills for beneficiaries who are 65 and older
or disabled. Under current law, wages are subject to a 2.9% Medicare
payroll tax. Workers and employers pay 1.45% each. Self-employed people
pay both halves of the tax (but are allowed to deduct half of this
amount for income tax purposes). Unlike the payroll tax for Social
Security, which applies to earnings up to an annual ceiling ($106,800
for 2010), the Medicare tax is levied on all of a worker's wages
without limit.
Under the provisions of the new
law, which take effect in 2013, most taxpayers will continue to pay the
1.45% Medicare hospital insurance tax, but single people earning more
than $200,0000 and married couples earning more than $250,000 will be
taxed at an additional 0.9% (2.35% in total) on the excess over those
base amounts. Employers will collect the extra 0.9% on wages exceeding
$200,000 just as they would withhold Medicare taxes and remit them to
the IRS. Companies won't be responsible for determining whether a
worker's combined income with his or her spouse makes them subject to
the tax. Instead, some employees will have to remit additional Medicare
taxes when they file income tax returns, and some will get a tax credit
for amounts overpaid. Self-employed persons will pay 3.8% on earnings
over the threshold. Married couples with combined incomes approaching
$250,000 will have to keep tabs on both spouses' pay to avoid an unexpected
tax bill. It should also be noted that the $200,000/$250,000 thresholds
are not indexed for inflation, so it is likely that more and more
people will be subject to the higher taxes in coming years.
Medicare payroll tax extended
to investments. Under
current law, the Medicare payroll tax only applies to wages. Beginning
in 2013, a Medicare tax will, for the first time, be applied to
investment income. A new 3.8% tax will be imposed on net investment
income of single taxpayers with adjusted gross income (AGI) above
$200,000 and joint filers with AGI over $250,000 (unindexed). Net
investment income is interest, dividends, royalties, rents, gross
income from a trade or business involving passive activities, and net
gain from disposition of property (other than property held in a trade
or business). Net investment income is reduced by properly allocable
deductions to such income. However, the new tax won't apply to income
in tax-deferred retirement accounts such as 401(k) plans. Also, the new
tax will apply only to income in excess of the $200,000/$250,000
thresholds. So if a couple earns $200,000 in wages and $100,000 in
capital gains, $50,000 will be subject to the new tax. Because the new
tax on investment income won't take effect for three years; that leaves
more time for Congress and IRS to tinker with it. So we can expect lots
of refinements and "clarifications" between now and when the
tax is actually rolled out in 2013.
Floor on medical expenses
deduction raised from 7.5% of AGI to 10%. Under current law, taxpayers can take an itemized
deduction for unreimbursed medical expenses for regular income tax
purposes only to the extent that those expenses exceed 7.5% of the
taxpayer's AGI. The new law raises the floor beneath itemized medical
expense deductions from 7.5% of AGI to 10%, effective for tax years
beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and
older (and their spouses) will remain unchanged at 7.5% through 2016.
Limit on reimbursement of
over-the-counter medications from HRAs, HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter
drugs not prescribed by a doctor from being reimbursed through a health
reimbursement account (HRA) or health flexible savings accounts (FSAs)
and from being reimbursed on a tax-free basis through a health savings
account (HSA) or Archer Medical Savings Account (MSA), effective for
tax years beginning after Dec. 31, 2010.
Increased penalties on
nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from
an HSA or an Archer MSA that are not used for qualified medical
expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the
disbursed amount, effective for distributions made after Dec. 31, 2010.
Health flexible spending arrangements
(FSAs) are limited to $2,500. An FSA is one of a number of tax-advantaged financial
accounts that can be set up through a cafeteria plan of an employer. An
FSA allows an employee to set aside a portion of his or her earnings to
pay for qualified expenses as established in the cafeteria plan, most
commonly for medical expenses but often for dependent care or other
expenses. Under current law, there is no limit on the amount of
contributions to an FSA. Under the new law, however, allowable contributions
to health FSAs will capped at $2,500 per year, effective for tax years
beginning after Dec. 31, 2012. The dollar amount will be indexed for
inflation after 2013.
Dependent coverage in employer
health plans.
Effective on Mar. 23, 2010, the new law extends the general exclusion
for reimbursements for medical care expenses under an employer-provided
accident or health plan to any child of an employee who has not
attained age 27 as of the end of the tax year. This change is also
intended to apply to the exclusion for employer-provided coverage under
an accident or health plan for injuries or sickness for such a child. A
parallel change is made for VEBAs and 401(h) accounts. Also,
self-employed individuals are permitted to take a deduction for the
health insurance costs of any child of the taxpayer who has not
attained age 27 as of the end of the tax year.
Excise tax on indoor tanning
services. The new law imposes a 10%
excise tax on indoor tanning services. The tax, which will be paid by
the individual on whom the tanning services are performed, but
collected and remitted by the person receiving payment for the tanning
services, will take effect July 1, 2010.
Liberalized adoption credit and
adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption
tax credit is increased by $1,000, made refundable, and extended
through 2011. The adoption assistance exclusion is also increased by
$1,000.
I hope this information is
helpful. If you would like more details about these provisions or any
other aspect of the new law, please do not hesitate to call.
Very truly yours,
Kevin A. Cameron,
Partner, CPA
|
