Wednesday, March 24, 2010
Posted 11 a.m. Eastern
Welcome back to the grand tour of taxes in the new health care reform law.
Yesterday we looked at five tax-related provisions -- the tanning tax, adoption tax credit and exclusion, health coverage costs reporting, medical expenses definitions and taxes on medical spending account withdrawals.
All of those take effect this year or next.
Today we start three years down the health care reform road and look at tax changes beginning in 2013.
FSA contributions reduced: FSAs are use-it-or-lose-it programs. If you don't spend all the cash, the leftover goes back to your employer. Unfortunately for FSA owners, health care industry studies regularly show that people lose money on medical FSAs because of that rule.
Well, the good news from health care reform is that these folks should lose less. No, the must-spend rule isn't changing; the amount of money you can put into an FSA each year will be limited starting in 2013 to $2,500. The contribution amount will be indexed for inflation in subsequent years.
Increased medical itemization threshold: The number of Schedule A filers who claim medical expenses is relatively small. That figure is about to get even smaller. In 2013 rather than needing medical costs that exceed 7.5 percent of your adjusted gross income to claim a deduction, you'll need to accumulate costs in excess of 10 percent. Individuals older than 65 will still be able to use the 7.5 percent threshold through 2016.
Medicare tax increase: Part of our payroll taxes go each payday to Medicare and Social Security. The Social Security portion of that tax, 6.2 percent, stops after you reach a certain income level, but the 1.45 percent Medicare portion applies to every dollar you earn.
That 1.45 percent tax rate for Medicare will continue for most of us. But in 2013, if you make more than $200,000 (or you and your spouse earn more than $250,000), your Medicare this tax will go up 0.9 percent to 2.35 percent. There is no corresponding increase for the employer's portion.
The law also will assess a 3.9 percent Medicare tax on net investment income earned by same higher-income households. One break here is that retirement plan distributions won't be taxes. Still, I see some potential problems along the alternative minimum tax line since the Medicare investment tax income thresholds won't (as of yet) be indexed for inflation.
Excise taxes for no insurance: Most of us will have to have what the new law calls acceptable health insurance coverage in 2014 or we'll pay an excise tax, aka a penalty, of $95. The penalty amounts will increase annually, to $325 in 2015 and $694 in 2016, after which the dollar amounts are indexed. If, however, you can't find affordable coverage, you won't be penalized.
Employers also will face an excise tax/penalty if they don't provide health insurance coverage to their workers.
"Cadillac" coverage means taxes: Starting in 2018, a tax will be assessed on employer-provided plans where the annual cost of coverage is more than $27,500 for family policies and $10,200 for single coverage. The amounts increase to $30,950 for families and $11,850 for individuals who are retirees or work in high risk professions.
If you had one of these high-dollar plans, you wouldn't pay the tax. It will be borne by employers and insurance companies. Still, there's concern that the costs will be passed along to the covered workers via higher premiums.
IRS role in health care: Finally, since we've got all these new taxes, where does that leave the agency that must administer and collect them? With a lot of work to do.
"It is certain that the IRS will play a large role in broadening insurance coverage through tax incentives and penalties on the one hand," says CCH Principal Federal Tax Analyst Mark Luscombe. "And on the other hand collecting new taxes to pay part of the costs."
If you want to look at more, and nontax, provisions, Bankrate explains what's in health care reform for you.
Also, I highly recommend two timelines of the new law's provisions. The Tax Foundation focuses on the new health care law's various tax provisions, while the one compiled by the three House committees that worked on the bill offers a bit more explanation of the upcoming laws.
Read more tax blogs.