The Supreme Court recently upheld the constitutionality of the 2010 health care reform legislation. In addition to the changes to the U.S. Health Care System, below are some of the tax-related provisions.
Individual mandate. The law contains an "individual mandate" - a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax (or shared responsibility penalty) after 2013.
Higher Medicare payroll tax on wages. 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 $200,000 and married couples earning more then $250,000 will be taxed an additional 0.9% (2.35%) total on the excess over those base amounts. Self-employed persons will pay 3.8% on earnings over the threshold.
Medicare payroll tax extended to investments. 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 AGI above $200,000 and joint filers over $250,000. Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passives 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 law.
Floor on medical expenses deduction: raised from 7.5% of adjusted gross income (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.
Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The law increases the tax distributions from a health savings account 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.
Limit health flexible spending arrangements (FSAs) 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. Allowable contributions to health FSAs will be 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.
Now that the Supreme Court has ruled on the law, the IRS is expected to issue much more guidance in the coming months on the various tax provisions.
Although much of the uncertainty over the legislation has been removed due to the Supreme Court's decision, there are renewed pledges by Republicans and the expected Republican nominee for President, Mitt Romney, to repeal the law in its entirety.
To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
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