The following summary of the tax impact of the health care reform legislation is based on information available as of March 23, 2010. As more details are learned (the fine print!), I will provide further updates.
Increase in Medicare Tax: Beginning in 2013, the employee portion of the Medicare tax on compensation/earnings will increase by .9% (from 1.45% to 2.35%) for taxpayers with earned income in excess of $200,000, or $250,000 for joint filers. This also applies to self-employment income. It appears that the tax will affect all wages, but only for taxpayers with income above those levels. Implementation of this may be challenging or complicated, as taxpayers may not known until after the end of the tax year, whether this tax will apply, until their AGI is determined.
Investment Income Tax: Starting in 2013, at the same income levels as above, there will be an additional 3.8% tax on net investment income (interest, dividends, capital gains). I have seen some publications that include rental income in this definition, as well as annuity income, royalties. It would not apply to retirement plan distributions. This may cause a review of annuities, if this tax applies to annuity distributions.
Medical Expense deduction: For 2013 – 2016, medical expenses that exceed 10% of adjusted gross income will be deductible as an itemized deduction. This is an increase from the current level of 7.5% of AGI. Thus, for affected taxpayers, this will reduce the amount of medical expenses that they will be able to deduct. The new level will not apply to taxpayers older than 65 by the end of the respective year.
Flexible Spending Accounts and Health Savings Accounts: Beginning in 2011, includable expenses will be limited. This needs further clarification. Based on what I’ve seen, only prescribed medications and insulin will be includable. Over the counter products will be excluded after 2010. Beginning in 2013, the annual contribution to FSA account is limited to $2,500, reduced from the current level of $5,000.
Impact on Children under age 27: Within 6 months of becoming law, employees should be able to keep their children on their medical insurance policies through the age of 26. Currently, this is a state specific law. Michigan currently allows children to remain on their parents’ policies until age 24, if enrolled in college.
IRS: The IRS will be very involved in various reporting and enforcement parts of this legislation, through reporting by employers, individuals on their income tax returns and health insurance companies. Insurers will be providing information to the IRS annually regarding the amount of coverage they provide.
Business impacts: The impact on business are unclear at this point, or too detailed to provide in this format. The impact will depend primarily on the size of a business, depending on employee levels (less than 10, less than 25 or much larger employers), as well as the average employee compensation. Most of the credits available to businesses to encourage or offset the cost of providing employee health insurance are for companies that have average compensation of $40,000 or $20,000 for smaller employees.
Business information reporting: Starting in 2011, employers will need to include the value of employees’ health insurance coverage paid by the employer on each employee’s annual Form W-2.
The act also requires, starting in 2012, businesses to file information returns (a Form 1099) for all payments aggregating more than $600 in a calendar year to a single payee, including corporations. This was reported by the Journal of Accountacy, published by the AICPA, and would be a vast expansion and burden, in the preparation and filings of Form 1099s.
Adoption Credit: For 2010, credit increased by $1,000, to $13,170 per child, and made refundable. This will be adjusted for inflation in future years.
Medicare and “doughnut hole”: For the Medicare prescription coverage, seniors are covered for initial payments, up to a certain level. After exceeding that level, payments are out of pocket (referred to as the “doughnut hole”), up until another level, after which Medicare prescription coverage resumes. The gap amount will be gradually reduced, beginning with a $250 rebate in 2010, and eventually eliminated after 2020. In 2011, there will be a 50% discount on brand name drugs.
Sources: New York Times, Wall Street Journal, USA Today and Journal of Accountancy, as of March 22 and 23, 2010