Several tax provisions of the Affordable Care Act take effect Jan. 1, 2013. Leon LaBrecque, an attorney and certified public accountant whose firm LJPR is based in Troy, Mich., lists the changes that most affect retirement planning -- especially those whose retirement income is at levels most of us would consider comfortable. The expiration of the Bush tax cuts will raise taxes still more, but this discussion is limited to those associated with health care reform.
Investment tax. The new unearned income Medicare contribution imposes a 3.8 percent tax on dividends, interest and capital gains for single taxpayers with adjusted gross income, or AGI, more than $200,000 or $250,000 for married filing jointly.
Increased medical expense itemized deduction limit. The income threshold for claiming the itemized deduction for medical expenses rises from 7.5 percent of AGI to 10 percent of AGI. People 65 and older still will be able to claim the itemized deduction for medical expenses at 7.5 percent of AGI through 2016.
Increase in Medicare payroll tax. The hospital insurance tax part of FICA payroll taxes goes from 1.45 percent to 2.35 percent on AGI of more than $200,000 for single filers, $250,000 for married filing jointly or surviving spouse, and $125,000 for married people filing separately.
New tax on medical devices. The Affordable Care Act imposes a 2.3 percent excise tax on every medical device, including things such as pacemakers and artificial joints.
Increased tax on health savings account, or HSA, withdrawals. The penalty for nonmedical early withdrawals from an HSA doubles from 10 percent to 20 percent. Withdrawals from other tax-advantaged accounts such as IRAs will continue to carry a 10 percent penalty.
LaBrecque recommends that high-income people living in retirement or close to it take these five potentially tax-saving steps.
- Consider moving municipal bonds into taxable accounts and equities into tax-advantaged accounts.
- If you're not yet old enough for Medicare, do as many optional medical treatments as you can in 2012. For instance, schedule and pay for dental implants this year when more of the cost will be tax-deductible.
- If you have the option, get that pacemaker or artificial hip installed this year before the device is taxed at premium rates.
- While nonmedical withdrawals from an HSA are usually a bad idea, if you must, better to do it this year than next.
- If you can control your earned income -- you're self-employed or you have stock options that you can take this year or next -- there could be significant tax advantages to taking the income this year. But get your accountant to calculate your situation. Everybody is different.
One thing is for sure, LaBrecque says, "Tax cut expiration, payroll tax increases, budget cuts and a debt ceiling expiration could all contribute to a tumultuous year-end."