Concise Summary of Tax Effects of New Health Reform Law

Posted by Wm. C. Prewitt, M.S., CFP on 30 March 2010 | 0 Comments


How will the new health-reform law affect your taxes? Here are 10 provisions that could affect you, with some kicking in sooner rather than later.  This is a good summary by Kristen Gerencher of the tax effects of the new heath reform law that appeared in MarketWatch Blogs:

1. A 10% tax on the use of indoor tanning beds will take effect for services on or after July 1.

2. Later this year, people with flexible spending accounts will see a slight change: No more using those pretax dollars to buy over-the-counter medications.

3. The bigger change to FSAs comes in 2013, when the amount you can sock away for health expenses will be capped at $2,500 a year. Many people lowball the amount they set aside anyway because they’re afraid of forfeiting money with the use-it-or-lose-it nature of these accounts, but others who use their FSAs to get a break on expenses for chronic illnesses may have to change their financial planning accordingly.

4. Starting next year, the penalty for using a health savings account for nonqualified medical expenses rises to 20% — double what is now.

5. Starting in 2013, people with income above $200,000 for singles or $250,000 for married couples will see their Medicare payroll taxes rise nearly 1 percentage point to 2.35%.

6. A new Medicare tax of 3.8% will be levied on high earners’ investment income including interest, dividends and capital gains that exceed those two $200,000-plus thresholds.

7. Also in 2013, if you itemize on your income taxes, the amount you’ll need to claim a deduction for medical expenses will rise to 10% of adjusted gross income from today’s 7.5%. But people age 65 and older won’t face the 10% threshold until 2017.

8. Starting in 2014, for the first time most Americans will be required to carry health insurance, with government subsidies if they can’t afford it, or face a fine.  The fines for noncompliance are set to rise annually, beginning with $95 or 1% of income, whichever is greater, and growing to as much as $695 or 2.5% of taxable income by 2016. While some state attorneys general are challenging the legality of this provision, many experts say it’s likely to stand. Enforcement mechanisms are still being worked out, but one may be that taxpayers have to submit proof of insurance on their tax forms.

9. Looking further out, an excise tax of 40% on high-cost health insurance begins in 2018. It will apply to the amount of annual premiums exceeding $10,200 for individuals or $27,500 for families, but the thresholds are higher for early retirees and workers in certain high-risk jobs. The tax is supposed to hit insurers or plan administrators, who may or may not pass it on to workers.

10. There’s good news for small businesses. Those with up to 25 employees will be eligible for new tax credits starting later this year to help them provide coverage for their workers. The tax credits would cover up to 35% of the cost of health-insurance premiums. About 4 million small businesses are expected to qualify.

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