How Will Healthcare Reform Affect MY Taxes?

As most people are aware, President Obama recently signed into law a major set of new laws on health care. Some believe this bill will save our healthcare system, while others predict it will simply make matters (and costs) worse.  

Although no one can conclusively determine if this new legislation will “fix” our healthcare system. We do know it will affect virtually every American in some way; and could significantly impact YOUR income taxes in the future.  

Penalty For Not Being Insured –Beginning in 2014, some taxpayers will be assessed a tax penalty for failing to maintain minimum essential coverage. This penalty will be phased-in from 2014 to 2016 and will be the greater of:

A. 2.5% of household income over the threshold required for income tax filing, or
B. $695 (indexed for inflation after 2016) per uninsured adult in the household ($348 if under age 18).

Maximum Penalty – The total household penalty cannot exceed 300% of the per-adult penalty ($2,085) or national annual premium for the “bronze level” health plan offered through the Insurance Exchange that year based on the household size.  Penalties are prorated based upon the months that the required insurance is not in force.

Taxpayers Exempt from the Penalty – Individuals are exempt from the penalty if either their employer’s sponsored coverage or the lowest cost “bronze” coverage exceeds 8% of household income.  Also exempt are individuals residing outside of the U.S., those exempted for religious purposes, and those whose income is below the required threshold for having to file a return.

Low-Income Health Exchange Participation Credits -Beginning in 2014, tax credits will be available for low-income individuals and families with incomes up to 400% of the federal poverty level that are  available for Medicaid, employer-sponsored insurance, or other acceptable coverage.  Based upon the current poverty levels, the credit would phase-out at $42,420 for individuals and at $88,200 for a family of four.  In addition, a cost-sharing subsidy will be provided for low-income individuals to help pay for their coverage.

Free Choice Vouchers -Beginning in 2014, employers who offer minimum essential coverage through an eligible employer-sponsored plan and pay a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage through the Insurance Exchange.  An employee qualified to make this choice is an individual with a required contribution to the employer plan that exceeds 8%, but does not exceed 9.5% of the household income and has income that does not exceed 400% of the poverty line for the family.

Dependent Coverage – Effective March 23, 2010, any dependent children who have not attained age 27 as of the end of the tax year and provided the child also is eligible to be claimed as a dependent under their parents return for tax purposes will be eligible for coverage under their parents employer-provided health or accident plan.

Additional Taxes For Those Earning Over $200,000 – Beginning in 2013, higher-income taxpayers will be subject to the following additional taxes:

Additional Hospital Insurance Tax - The Hospital Insurance (HI) tax rate (currently at 1.45%) will increase by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married filing jointly).

Surtax on Unearned Income – A 3.8% surtax, called the Unearned Income Medicare Contribution, would be placed on the net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return).  Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from the sale of property (other than property held in a trade or business).  “Net” investment income is investment income reduced by allowable investment expenses. Earned income, distributions from qualified retirement plans and IRAs will not be subject to the surtax.

Employer Flexible Health Spending Plan Contributions Limited – Beginning in 2013, the maximum contribution to an employer’s health flexible spending accounts (FSAs) will be limited to $2,500 per year. This amount will be indexed for inflation after 2013.

Over-the-Counter Medication Restriction for Employer-Provided Plans – Beginning in 2011, over-the-counter medications, except for doctor prescribed over-the-counter medication and insulin will no longer qualify for reimbursement.  This restriction applies to health reimbursement accounts, health flexible savings accounts, health savings accounts, and Archer medical savings accounts.

Increased Tax on Non-qualifying HSA or Archer MSA Distributions – Beginning in 2011, the additional tax for Health Savings Account withdrawals other than for qualified medical expenses before age 65 are increased from 10% to 20%, and the additional tax for Archer Medical Savings Account withdrawals  other than for qualified medical expenses is increased from 15% to 20%.

Medical Itemized Deductions Limited – Beginning in 2013, the threshold for claiming medical expenses on a taxpayer’s Schedule A is increased from 7.5% to 10% of Adjusted Gross Income, which is the same as the current alternative minimum tax (AMT) rate.  Individuals (and their spouses) age 65 and older will still be able to use the 7.5% of AGI rate through 2016.

Adoption Credit Limit Raised, Made Refundable and Extended – One of the non-health care related items included in the new law is an increase in the the adoption credit up to $13,170 (adjusted for inflation after 2010) and an extension of the credit through 2011. The credit also is changed from being nonrefundable to a refundable credit.

The above provisions can be found with more information about the Healthcare Reform Bill at www.healthreform.gov.

Many of the tax-related provisions of the Healthcare Reform Bill will not take effect for several years, but you can takes steps NOW to reduce your tax liability to the legal minimum. 

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