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More Tax Increases In Store for 2013
On June 28 2012, the Supreme Court upheld most of the provisions of The Patient Protection and Affordable Care Act. Here are some of the tax increases that might affect you starting in 2013:
Increased and Expanded Medicare Taxes
High-income taxpayers will be paying higher Medicare taxes. Under the current rules, individuals have Medicare taxes withheld from their salaries at a rate of 1.45% on each dollar earned at work. Since employers match the amount withheld, Medicare receives a total of 2.9% for each payroll dollar paid out. And, unlike Social Security taxes which max out at $110,100 (in 2012), there is no cap for Medicare taxes. Self-employed individuals also pay Medicare taxes at a rate of 2.9% on all of their net earnings.
Starting in 2013, the employee portion of the Medicare tax jumps by a whopping 62% – from the current rate of 1.45% to 2.35% – on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer match is slated to remain at 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers.
Example:
For example, if you’re single, and earn $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k – $200k) * .9%) for 2013.
For more information, check out the IRS’s Questions and Answers for the Additional Medicare Tax, which explains:
The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee’s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual’s income tax return (Form 1040).
To increase taxes for high-income individuals even more, the Medicare tax will also apply to unearned income for the first time since this tax was enacted. People over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income beginning in 2013. You will pay this tax in addition to any federal and state income taxes due on this income. We’ll provide you a link to this form when it becomes available.
Reduced Tax Breaks for Medical Expenses
Many employers offer their staff the ability to pay for their family’s healthcare costs with pre-tax dollars through a Flexible Savings Accounts (FSA) included as part of their benefits package. Starting in 2013, the maximum amount of money that you can set aside in an FSA will be cut in half to $2,500 per year. Plus, medical expenses you can pay through the FSA will exclude certain items currently allowed, including OTC medications. Please note, if you are married, both you and your spouse can put away the full $2,500 through your respective employer’s FSA.
The Patient Protection Act also makes it even tougher for individuals to deduct their medical expenses. Starting in 2013, you can only deduct your family’s medical expenses to the extent the allowable expenses exceed 10% of your adjusted gross income. That’s an increase of one-third over today’s threshold of 7.5% of AGI.
This new rule may not impact your taxes, however, thanks to the dreaded AMT. Since the current threshold for deducting medical expenses under the AMT is already 10% of AGI, many people who are hit by this tax every year might not see any tax increase due to this change.
Steps to Consider to Minimize These Taxes:
As with most other tax rules, there are ways to minimize the tax bite that will be caused by soon to be implemented changes to the Tax Code:
- Take a look at a Health Savings Account for your family. Money contributed into an HSA is tax-deductible, and money withdrawn for your family’s medical expenses is tax-free. We wrote about HSAs in our May 2012 Newsletter.
- Consider selling appreciated investments in 2012 if you would otherwise sell them in 2013. No one knows whether the tax rate on long-term capital gains will be higher than 15% in 2013. Add to this the 3.8% Medicare tax you’ll pay once your income exceeds $200k if single or $250k if married, and you could save a decent amount of taxes by selling by December 31st.
- Consider accelerating income into 2012 to reduce your 2013 income. This strategy includes one-time income generators, such as Roth Conversions.
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Filed under: Health Law & Policy, Taxation | Tagged: ACA, Andrew D. Schwartz, CPA, Flexible Savings Accounts, health savings account, Medicare Taxes, Patient Protection and Affordable Care Act, Supreme Court Upholds the PP-ACA Tax |
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ACA Saves Money?
The health care law – the Affordable Care Act – has saved consumers an estimated $2.1 billion on health insurance premiums according to a new report released today by the Department of Health and Human Services. For the first time ever, new rate review rules in the health care law prevent insurance companies in all states from raising rates with no accountability or transparency. To date, rate review has helped save an estimated $1 billion for Americans. Additionally, the law’s Medical Loss Ratio (or 80/20) rule is helping deliver rebates worth $1.1 billion to nearly 13 million consumers.
“The health care law is holding insurance companies accountable and saving billions of dollars for families across the country,” Secretary Sebelius said. “Thanks to the law, our health care system is more transparent and more competitive, and that’s saving Americans real money.”
Beginning Sept. 1, 2011, the health care law implemented federal rate review standards. These rules ensure that, in every state, insurance companies are required to publicly submit for review and justify their actions if they want to raise rates by 10 percent or more.
To assist states in this effort, the Affordable Care Act provides states with Health Insurance Rate Review Grants to enhance their rate review programs and bring greater transparency to the process. 42 states have used their rate review grant funds to make the rate review process stronger and more transparent.
These rules have brought more transparency and accountability to our health insurance marketplace and saved money for consumers. The report released today shows that because of rate review, consumers saved approximately $1 billion in premiums in the individual and small group markets.
This initiative is one of many in the health care law aimed at saving money for consumers and specifically works in conjunction with the 80/20 rule, which requires insurance companies to generally spend 80 percent of premiums on health care or provide rebates to their customers. Insurance companies that did not meet the 80/20 rule will provide nearly 13 million Americans with more than $1.1 billion in rebates this year. Americans receiving the rebate will benefit from an average rebate of $151 per household.
The rate review report released today is available at: http://www.healthcare.gov/law/resources/reports/rate-review09112012a.html.
Information on how states are using their rate review grant funds is available at: http://www.healthcare.gov/law/resources/reports/rate-review09202011a.pdf
General information about rate review is available at: http://www.healthcare.gov/law/features/costs/rate-review/
via Hope R. Hetico RN MHA
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HI documentation from other sources?
If you get Health Insurance from a source other than the HIEs, you will need to send your accountant, or Uncle Sam, the documentation.
If it is government insurance, such as Medicare, the government will send you the documentation. If it is employer insurance, the employer may provide you with Form 1095-B or Form 1095-C. If they do not provide either form, most tax preparers, CPAs and EAs can accept documentation such as a copy of the insurance policy.
Finally, if you cannot provide any documentation, but you are sure you had qualifying coverage, there is a statement for taxpayers to sign to that effect.
Bobby Whirley CPA
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Many Uninsured Do Not Know To Report Health Insurance Status
A recent survey of uninsured, nonelderly adults by the Urban Institute Health Policy Center found that:
• 52.3% did plan to file their 2014 taxes, 22.3% did not plan to, and 23.2% were not sure.
• 50.0% heard some or a lot about the requirement to report coverage.
• 18.7% heard only a little bit about the requirement to report coverage.
• 28.8% heard nothing at all about the requirement to report coverage.
Note: Adults who refused to report whether they planned to file a 2014 tax return are not shown.
Source: Health Reform Monitoring Survey, quarter 1 2015.
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