http://blog.accountants.intuit.com/?p=18853
The Affordable Care Act was enacted on March 23, 2010 and includes the following important tax provisions that take effect in 2013.
Increased tax for high-earning workers and self-employed
The Medicare payroll tax is the main source of financing for Medicare’s hospital insurance trust fund. This fund is responsible for paying the medical expenses for beneficiaries who are age 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax with workers and employers each responsible for half or 1.45%. Self-employed individuals pay both halves or 2.9%. The Medicare tax is levied on all wages or earned income without limit.
Under the new law, there will be an additional .9% hospital insurance tax (2.35% in total) that will apply to wages received in excess of $250,000 for married filing joint; $125,000 for married filing separate; and $200,000 for other filing statuses. This additional .9% tax applies to the employee’s portion of the Medicare payroll tax and is collected by the employer for wages in excess of $200,000. Self-employed individuals are also responsible for the additional .9% hospital insurance tax.
Surtax on unearned income of higher-income individuals
Currently, the Medicare payroll tax only applies to wages or earned income. Under the new law, the Medicare tax will also apply to investment income of individuals, estates and trusts. The surtax is set at 3.8% of the lesser of: 1) the taxpayer’s net investment income; or 2) the excess of modified adjusted income over $250,000 for married filing joint or qualified widow, $125,000 for married filing separate, and $200,000 for other filing statuses. For example, if a married couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new surtax.
Net investment income includes interest, dividends, royalties, rents, gross income from passive activities and the net gain from disposition of property (other than trade or business). Investment income is reduced by any allocable investment deductions. Income from tax-deferred retirement accounts (401(k) plans) or excluded items (interest on tax-exempt bonds) is not included in the definition.
Higher threshold for deducting medical expenses
Currently, taxpayers can take an itemized deduction for unreimbursed medical expenses only to the extent that expenses exceed 7.5% of the taxpayer’s adjusted gross income. Under the new law, the AGI floor is raised from 7.5% to 10%. The AGI floor for individuals age 65 and older remains at 7.5% through 2016, then it is increased to 10%.
Dollar cap on contributions to health FSAs
A Flexible Spending Arrangement (FSA) is an tax favored account and is established through an employer’s cafeteria plan. Under an FSA, an employee can set aside a portion of earnings to pay for expenses, such as medical, dependent care or other expenses, as established in the cafeteria plan. Currently, there is no limit on contributions to health FSAs. Under the new law, allowable contributions to health FSAs will capped at $2,500 per year and indexed for inflation after 2013.
Deduction eliminated for retiree drug coverage
A sponsor of a retiree prescription drug plan is eligible for subsidy payments received from the Health and Human Services department. The subsidy is equal to a portion of the retiree’s gross covered prescription drug costs. Subsidies are excludable from the taxpayer’s gross income.
Under current law, a taxpayer may claim a business deduction for any covered retiree prescription drug expenses. Under the new law, amounts otherwise allowable as a deduction for retiree prescription drug expenses must be reduced by the excludable subsidy payments received. In effect, this provision eliminates the double benefit the taxpayer may receive.
The Affordable Care Act was enacted on March 23, 2010 and includes the following important tax provisions that take effect in 2013.
Increased tax for high-earning workers and self-employed
The Medicare payroll tax is the main source of financing for Medicare’s hospital insurance trust fund. This fund is responsible for paying the medical expenses for beneficiaries who are age 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax with workers and employers each responsible for half or 1.45%. Self-employed individuals pay both halves or 2.9%. The Medicare tax is levied on all wages or earned income without limit.
Under the new law, there will be an additional .9% hospital insurance tax (2.35% in total) that will apply to wages received in excess of $250,000 for married filing joint; $125,000 for married filing separate; and $200,000 for other filing statuses. This additional .9% tax applies to the employee’s portion of the Medicare payroll tax and is collected by the employer for wages in excess of $200,000. Self-employed individuals are also responsible for the additional .9% hospital insurance tax.
Surtax on unearned income of higher-income individuals
Currently, the Medicare payroll tax only applies to wages or earned income. Under the new law, the Medicare tax will also apply to investment income of individuals, estates and trusts. The surtax is set at 3.8% of the lesser of: 1) the taxpayer’s net investment income; or 2) the excess of modified adjusted income over $250,000 for married filing joint or qualified widow, $125,000 for married filing separate, and $200,000 for other filing statuses. For example, if a married couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new surtax.
Net investment income includes interest, dividends, royalties, rents, gross income from passive activities and the net gain from disposition of property (other than trade or business). Investment income is reduced by any allocable investment deductions. Income from tax-deferred retirement accounts (401(k) plans) or excluded items (interest on tax-exempt bonds) is not included in the definition.
Higher threshold for deducting medical expenses
Currently, taxpayers can take an itemized deduction for unreimbursed medical expenses only to the extent that expenses exceed 7.5% of the taxpayer’s adjusted gross income. Under the new law, the AGI floor is raised from 7.5% to 10%. The AGI floor for individuals age 65 and older remains at 7.5% through 2016, then it is increased to 10%.
Dollar cap on contributions to health FSAs
A Flexible Spending Arrangement (FSA) is an tax favored account and is established through an employer’s cafeteria plan. Under an FSA, an employee can set aside a portion of earnings to pay for expenses, such as medical, dependent care or other expenses, as established in the cafeteria plan. Currently, there is no limit on contributions to health FSAs. Under the new law, allowable contributions to health FSAs will capped at $2,500 per year and indexed for inflation after 2013.
Deduction eliminated for retiree drug coverage
A sponsor of a retiree prescription drug plan is eligible for subsidy payments received from the Health and Human Services department. The subsidy is equal to a portion of the retiree’s gross covered prescription drug costs. Subsidies are excludable from the taxpayer’s gross income.
Under current law, a taxpayer may claim a business deduction for any covered retiree prescription drug expenses. Under the new law, amounts otherwise allowable as a deduction for retiree prescription drug expenses must be reduced by the excludable subsidy payments received. In effect, this provision eliminates the double benefit the taxpayer may receive.
