INCREASED TAXES AS PART OF HEALTH CARE REFORM

by Andrew D. Schwartz, CPA

Here we go.  On March 23rd, President Obama signed the Patient Protection and Affordable Care Act into law.  Below are some of the tax changes that were included as part of the Patient Protection Act:

Increased and Expanded Medicare Taxes

High-income taxpayers will be paying higher Medicare taxes.  Under the current rules, individuals have Medicare taxes withheld from their salaries at a rate of 1.45% on each dollar earned at work.  Since employers match the amount withheld, Medicare receives a total of 2.9% for each payroll dollar paid out.  And unlike Social Security taxes which max out at $106,800, there is no cap for Medicare taxes.  Self-employed individuals also pay Medicare taxes at a rate of 2.9% on all of their net earnings.

Starting in 2013, the employee portion of the Medicare tax jumps by a whopping 62%- from the current rate of 1.45% to 2.35% - on earned income in excess of $200k for single individuals and $250k for married couples.  As of now, the employer match is slated to remain at 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers.

To make matters worse, for the first time since being enacted, the Medicare tax will also apply to unearned income. People over the $200k threshold should expect to pay Medicare taxes on interest, dividends, capital gains, and net rental income beginning in 2013.

Reduced Tax Breaks for Medical Expenses

Many employers offer their staff the ability to pay for their family's healthcare costs with pre-tax dollars through a Flexible Savings Accounts (FSA) included as part of their benefits package.  Starting in 2013, the maximum amount of money that you can set aside in an FSA will be cut in half to $2,500 per year.  Plus, medical expenses you can pay through the FSA will exclude certain items currently allowed, including OTC medications.

The Patient Protection Act also makes it even tougher for individuals to deduct their medical expenses.  Starting in 2013, you can only deduct your family's medical expenses to the extent the allowable expenses exceed 10% of your adjusted gross income.   That's an increase of one-third over today's threshold of 7.5% of AGI.

There is some good news, however.  The rules do not impact the medical expenses allowed when calculating the dreaded AMT.  Since the current threshold for deducting medical expenses under the AMT is already 10% of AGI, many people who are hit by this tax every year might not see any tax increase due to this change.

A third revenue raiser deals with the penalty for withdrawing money from a Health Savings Account that is not used to pay for your family's healthcare costs.  Currently, this penalty is equal of 10% of each dollar withdrawn.  Beginning in 2013, the penalty for non-healthcare withdrawals from an HSA doubles to 20%.

Penalty for No Coverage

Like the universal health insurance rules we have here in Massachusetts, the Patient Protection Act adds a penalty for individuals who don't have health insurance that meets a "minimum essential coverage" threshold.  This new non-coverage penalty starts at $95 per person in 2014, jumps to $325 per person in 2015, and then jumps again to $695 per person the next year.  After 2016, this penalty is indexed for inflation.  Expect to report and remit this penalty as part of your federal income tax return.

More to Come

Who issues major tax legislation during the height of tax season?  I'm sure we'll continue to focus on many of these new tax rules in our subsequent months' newsletters.

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WHAT THE F? IT'S ALMOST APRIL 15TH

April 15th is just a few weeks away.  Check out these alternatives to dropping the F-bomb as the due date for filing your 2009 tax returns approaches that we wrote about in our April 2009 newsletter.

Or listen to these podcasts about filing for an extension:

• Filing an Extension (as originally heard on Reach MD) (13 minutes)
• Filing an Extension (as originally heard on Greater Boston Radio) (9 minutes)

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2009 & 2010 TAX FACTS

• For 2009, the standard deduction for a single individual is $5,700 and for a married couple is $14,400. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2009, the personal exemption is $3,650. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $106,800 for 2009 and 2010.
  
• The standard mileage rate is $.50 per business mile as of January 1, 2010, down from $.55 per mile for 2009.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2010. And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $5,000 for 2009 and 2010.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2010 to make your 2009 IRA contributions. 

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