Health Care Reform Tax Implications
Caution – This email has 13 points. It's a summary but there is a lot to review!
The new health care reform law is full of new taxes or increases that will affect many individuals and businesses. It will be years before most of these hikes will happen but it's not all bad. The law also has tax breaks to help both individuals and small businesses pay for insurance.
1. A new 10% excise tax on indoor tanning services started on June 30, 2010.
2. The new law gives small firms tax credits for providing coverage in 2010. Employers with 10 or fewer workers and average annual wages of less than $25,000 can receive a credit of up to 35% of their health premium costs each year through 2013. The credit is phased out for larger firms and disappears completely if a company has more than 25 employees or average annual wages of $50,000 or more.
Beginning in 2014, the system will change. The law requires each state to establish a health insurance exchange -- a marketplace where individuals, the self-employed and small businesses can buy health insurance coverage. The government-regulated exchanges would offer insurance policies with different levels of coverage and price tags. Small firms that sign up with one of the health exchanges can receive a credit of up to 50% of their costs -- with the same phaseouts for average income and size as the earlier program. The credit disappears after 2015.
3. Businesses will be required to include the value of the health care benefits they provide to employees on W-2s. Although this was originally required beginning with W-2s for 2011 (issued early in 2012), just last week a one-year delay was announced. This requirement will be mandatory in 2012 for W-2s in 2013. The amount reported is not considered taxable income.
4. The deduction employers now take for providing Medicare Part D prescription drug coverage to their retirees to the extent that the federal government subsidizes the coverage will be eliminated. This will not take effect until 2013.
5. The penalty for nonqualified distributions from health savings accounts will be doubled to 20% beginning in 2011.
6. An annual limit of $2,500 that employees can contribute to health care flexible spending accounts will take effect in 2013.
7. Funds from flexible spending accounts, health reimbursement arrangements or health savings accounts can no longer be used for over-the-counter medications starting in 2011.
8. Starting in 2013, a 0.9% Medicare surtax will apply to wages in excess of $200,000 for single taxpayers and over $250,000 for married couples. Also, for the first time ever, a Medicare tax will apply to investment income of high earners. The 3.8% levy will hit the lesser of (1) their unearned income or (2) the amount by which their adjusted gross income exceeds the $200,000 or $250,000 threshold amounts. The new law defines unearned income as interest, dividends, capital gains, annuities, royalties, and rents. Tax-exempt interest won't be included, nor will income from retirement accounts.
9. Itemized deductions for medical expenses will be increased to 10% from the current 7.5% beginning in 2013. Taxpayers age 65 and over are exempt from the cutback through 2016.
10. Beginning in 2018, a new 40% excise tax will be put on high-cost health plans, levied on the portion that exceeds $10,200 for individuals and $27,500 for families. This could affect individual policies as well as employer plans.
11. Individuals who have no health coverage by 2014 will have a new tax. This will be phased in over three years, starting at the greater of $95, or 1% of income, in 2014, and rising to the greater of $695, or 2.5% of gross income, in 2016.
12. In 2014, a tax credit will help low-income people purchase coverage. To be eligible, a person's household income must be between 100% and 400% of the federal poverty level, approximately $11,000 to $44,000 for singles and $22,000 to $88,000 for families. The credit is a sliding scale, based on income. As the family's income rises, the credit is phased out.
13. A nondeductible fee will be charged to businesses with 50 or more employees if the firms fail to offer adequate coverage. The fee will equal $2,000 times the number of employees, though it won't count the first 30 workers in that calculation.
Caution – This email has 13 points. It's a summary but there is a lot to review!
The new health care reform law is full of new taxes or increases that will affect many individuals and businesses. It will be years before most of these hikes will happen but it's not all bad. The law also has tax breaks to help both individuals and small businesses pay for insurance.
1. A new 10% excise tax on indoor tanning services started on June 30, 2010.
2. The new law gives small firms tax credits for providing coverage in 2010. Employers with 10 or fewer workers and average annual wages of less than $25,000 can receive a credit of up to 35% of their health premium costs each year through 2013. The credit is phased out for larger firms and disappears completely if a company has more than 25 employees or average annual wages of $50,000 or more.
Beginning in 2014, the system will change. The law requires each state to establish a health insurance exchange -- a marketplace where individuals, the self-employed and small businesses can buy health insurance coverage. The government-regulated exchanges would offer insurance policies with different levels of coverage and price tags. Small firms that sign up with one of the health exchanges can receive a credit of up to 50% of their costs -- with the same phaseouts for average income and size as the earlier program. The credit disappears after 2015.
3. Businesses will be required to include the value of the health care benefits they provide to employees on W-2s. Although this was originally required beginning with W-2s for 2011 (issued early in 2012), just last week a one-year delay was announced. This requirement will be mandatory in 2012 for W-2s in 2013. The amount reported is not considered taxable income.
4. The deduction employers now take for providing Medicare Part D prescription drug coverage to their retirees to the extent that the federal government subsidizes the coverage will be eliminated. This will not take effect until 2013.
5. The penalty for nonqualified distributions from health savings accounts will be doubled to 20% beginning in 2011.
6. An annual limit of $2,500 that employees can contribute to health care flexible spending accounts will take effect in 2013.
7. Funds from flexible spending accounts, health reimbursement arrangements or health savings accounts can no longer be used for over-the-counter medications starting in 2011.
8. Starting in 2013, a 0.9% Medicare surtax will apply to wages in excess of $200,000 for single taxpayers and over $250,000 for married couples. Also, for the first time ever, a Medicare tax will apply to investment income of high earners. The 3.8% levy will hit the lesser of (1) their unearned income or (2) the amount by which their adjusted gross income exceeds the $200,000 or $250,000 threshold amounts. The new law defines unearned income as interest, dividends, capital gains, annuities, royalties, and rents. Tax-exempt interest won't be included, nor will income from retirement accounts.
9. Itemized deductions for medical expenses will be increased to 10% from the current 7.5% beginning in 2013. Taxpayers age 65 and over are exempt from the cutback through 2016.
10. Beginning in 2018, a new 40% excise tax will be put on high-cost health plans, levied on the portion that exceeds $10,200 for individuals and $27,500 for families. This could affect individual policies as well as employer plans.
11. Individuals who have no health coverage by 2014 will have a new tax. This will be phased in over three years, starting at the greater of $95, or 1% of income, in 2014, and rising to the greater of $695, or 2.5% of gross income, in 2016.
12. In 2014, a tax credit will help low-income people purchase coverage. To be eligible, a person's household income must be between 100% and 400% of the federal poverty level, approximately $11,000 to $44,000 for singles and $22,000 to $88,000 for families. The credit is a sliding scale, based on income. As the family's income rises, the credit is phased out.
13. A nondeductible fee will be charged to businesses with 50 or more employees if the firms fail to offer adequate coverage. The fee will equal $2,000 times the number of employees, though it won't count the first 30 workers in that calculation.
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