I can’t believe another year is almost over and here we are contemplating tax law changes under the Health Care Reform Acts of 2010. A number of important tax increases will go into effect next year. I recall familiarizing myself with these new acts almost three years ago and thinking there was a long way to go until they went into effect. Guess what – the time is here. Following are a few of the key increases that I feel need highlighting and affect quite a few taxpayers.
Increased 0.9% Medicare (Health Insurance or HI) Tax for High-Earning Workers and Self-Employed taxpayers
Beginning in 2013, an additional 0.9% hospital insurance (HI) tax applies to wages received with respect to employment in excess of: $250,000 for joint returns; $125,000 for married taxpayers filing a separate return; and $200,000 in all other cases. The additional 0.9% HI tax also applies to self-employment income for the tax year in excess of the above figures. For a married couple earning $300,000, the increased medicare tax will cost them an additional $450 ($300,000 less $250,000 x .9%).
Surtax on Unearned Income of Higher-Income Individuals
Beginning in 2013, an unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. For an individual, the tax is 3.8% of the lesser of either (1) net investment income (interest, dividends, annuities, royalties, rent and capital gain income)or (2) modified adjusted gross income over certain threshold amounts ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). For surtax purposes, tax free or municipal interest and veterans' benefits are still exempt.
Higher Threshold for Deducting Medical Expenses
Beginning in 2013, unreimbursed medical expenses will be deductible by taxpayers under age 65 only to the extent they exceed 10% of adjusted gross income (AGI). If the taxpayer or his or her spouse has reached age 65 before the close of the tax year, a 7.5% floor applies.
Dollar Cap on Contributions to Health FSAs.
Beginning in 2013, for a health flexible spending account (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) can't exceed $2,500.