April
2, 2010
Dear
Client,
We
are writing to give you a brief overview of the key tax changes affecting
individuals in the recently enacted health reform legislation. Please call our
offices 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 after 2013. 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
health care legislation provides tax credits to low and middle income
individuals and families for the purchase of health insurance. Specifically,
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.
Higher Medicare taxes on high-income taxpayers:
High-income taxpayers will be subject to 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.
Self-employed persons will pay 3.8% on earnings over the threshold.
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 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 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 will not
apply to income in tax-deferred retirement accounts such as 401(k) plans. In
addition, the new tax will apply only to income in excess of the
$200,000/$250,000 thresholds. Therefore, if a couple earns $200,000 in wages
and $100,000 in capital gains, $50,000 will be subject to the new tax.
Floor on medical expenses deduction raised from 7.5% of adjusted
gross income (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 reimbursement of over-the-counter medications from 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 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. 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. 30, 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. In addition, 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.
We
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,
Gosling & Company, P.C.
Certified Public Accountants