I've just attended the first of several tax update classes I'm scheduled to take over the next couple of months. This one covered a number of technical topics but what I want to focus on at this time is information about the new Health Care Act.
There are provisions of the new Health Care Act that are effective this year, but most kick in in subsequent years. Here's what I learned, year by year.
2010
A new tax credit for small employers who provide health coverage for their employees. The credit is available for employers with no more than 25 full-time equivalent employees with average annual wages no greater than $50,000. The credit may be as high as 50% of the premiums you pay for your employees but is phased down by the sum of formulas based on the number of full time equivalent employees and average annual wages in excess of $25,000. If you think this credit might apply to you, please call me immediately so that we can discuss it further
Any health insurance plan that covers dependents must be extended to provide coverage of unmarried adult children through age 26. This includes self-employed health insurance plans and retiree health insurance plans. Coverage must be provided for the health plan year beginning after September 23, 2010. That means that if your health plan year started on July 1, 2010 you won't be able to add your adult child until July 1, 2011.
The adoption credit has been increased to $13,170 and is now refundable. Those of you who have adoption credits that are being carried forward will be able to claim the full amount remaining when your 2010 taxes are filed.
Tanning salons have to charge a 10% excise tax on their services effective July 1.
2011
The penalty for withdrawing money from your Health Savings Account (HSA) for nonqualified purposes increases from 10% to 20%.
2012
All businesses will be required to issue a Form 1099 for all payments aggregating $600 or more during the calendar year to a single payee. For example, an individual who purchases a computer for their business from Costco for $900 will be required to issue a Form 1099 to Costco. If that same individual makes 25 purchases for their business from Office Max and the total for the year is more than $600, a Form 1099 will also have to be issued to Office Max. Purchases made by debit cards or credit cards are exempt from these reporting requirements. Legislation has already been introduced to eliminate this requirement but for now I recommend that you make all purchases for your business with a debit card or a credit card as of January 1, 2012.
Your W2 for 2011 that you receive in January 2012 will show the amount your employer is paying for your health insurance. DESPITE ALL THE INTERNET RUMORS, THIS DOES NOT MEAN YOU WILL BE TAXED FOR THAT AMOUNT AS INCOME IN 2011. This information is being included on the W2 for your information much the same as other information is included like sick leave usage and retirement contributions. Beginning in 2018 "cadillac" health plans will be taxed. See additional information under the 2018 heading.
2013
A number of changes to the MediCare system will occur this year to keep MediCare solvent.
Individuals will pay an additional 0.9% Medicare tax on wages and self-employment income on amounts earned above $250,000 for a couple, $125,000 for those who are married but filing separately and $200,000 for all others. Employers will be required to withhold at the 0.9% rate on an employee's salary in excess of $200,000 without regard to a spouse's income. Any underpayment or overpayment will be dealt with on the income tax return. Two examples - One spouse makes $225,000, the other spouse doesn't work, combined income is less than $250,000 on their joint return. The 0.9% in additional MediCare taxes that have been withheld because the working spouse made more than $200,000 will be refunded when the couple's tax return is filed. Second example - Each spouse makes $150,000, neither employer withholds the additional 0.9% MedidCare tax, combined income is more than $250,000 on their joint return. The couple is obligated to pay the additional 0.9% MediCare tax on $50,000 - the amount their income exceeds the $250,000 threshold - as part of their tax bill on April 15, 2014..
Under current law, MediCare taxes are assessed only on earned income. Beginning in 2013 a MediCare tax will also be imposed on the investment income of individuals, estates and trust. For individuals the tax will be 3.8% of net investment income or the excess of modified adjusted gross income over the threshold amounts, whichever is less. For estates and trusts, the additional tax will be 3.8% of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest estate and trust income tax bracket begins, whichever is less. Investment income is defined as income from dividends, interest, annuities, royalties, rents and gains from the sale of property such as stocks. Investment income does not include tax-exempt bond interest, distributions from retirement plans and IRAs, veterans' benefits or gain from the sale of a principal residence.
The threshold for claiming medical expenses as an itemized deduction will increase from 7.5% of adjusted gross income to 10% of adjusted gross income. There is a temporary reprieve for seniors - for tax years 2013 through 2016 the 7.5% floor continues to apply for individuals who reach the age of 65 before the end of the tax year. For married couples filing jointly, only one spouse needs to be 65 in order for the lower threshold to apply.
The amount that can be contributed to a cafeteria plan will be reduced to $2500 and will be adjusted for inflation in subsequent years.
2014
THE YEAR EVERYONE IS REQUIRED TO HAVE HEALTH INSURANCE.
Eligible familes - those with household incomes of at least 100% but not more than 400% of the poverty line who are not covered by an employer's insurance plan - will receive a tax credit to help subsidize the purchase of health insurance through a state health benefit exchange.
A penalty will be imposed for not having health insurance and will be paid as part of an individual's tax return.
Large employers will be charged a penalty if they don't offer affordable basic health insurance to their employees. A large employer is one with more than 50 employees.
The details of how these provisions will be implemented are still being worked out and there will be more information available as regulations are created to implement the Health Care Act.
2018
An excise tax of 40% will be imposed on the amount by which an employee's health coverage premiums exceed certain threshold amounts. This is the so-called "Cadillac Tax". The threshold amounts are $10,200 for single coverage and $27,500 for family coverage with an additional $1650 and $3450, respectively, for covered individuals 55 and over and individuals in high-risk occupations. These amounts will be adjusted for inflation and, in fact, are "pre-adjusted for inflation" meaning the threshold amounts are based on expected inflation rates by 2018. If those rates don't materialize, the thresholds will be ajusted.
There are provisions of the new Health Care Act that are effective this year, but most kick in in subsequent years. Here's what I learned, year by year.
2010
A new tax credit for small employers who provide health coverage for their employees. The credit is available for employers with no more than 25 full-time equivalent employees with average annual wages no greater than $50,000. The credit may be as high as 50% of the premiums you pay for your employees but is phased down by the sum of formulas based on the number of full time equivalent employees and average annual wages in excess of $25,000. If you think this credit might apply to you, please call me immediately so that we can discuss it further
Any health insurance plan that covers dependents must be extended to provide coverage of unmarried adult children through age 26. This includes self-employed health insurance plans and retiree health insurance plans. Coverage must be provided for the health plan year beginning after September 23, 2010. That means that if your health plan year started on July 1, 2010 you won't be able to add your adult child until July 1, 2011.
The adoption credit has been increased to $13,170 and is now refundable. Those of you who have adoption credits that are being carried forward will be able to claim the full amount remaining when your 2010 taxes are filed.
Tanning salons have to charge a 10% excise tax on their services effective July 1.
2011
The penalty for withdrawing money from your Health Savings Account (HSA) for nonqualified purposes increases from 10% to 20%.
2012
All businesses will be required to issue a Form 1099 for all payments aggregating $600 or more during the calendar year to a single payee. For example, an individual who purchases a computer for their business from Costco for $900 will be required to issue a Form 1099 to Costco. If that same individual makes 25 purchases for their business from Office Max and the total for the year is more than $600, a Form 1099 will also have to be issued to Office Max. Purchases made by debit cards or credit cards are exempt from these reporting requirements. Legislation has already been introduced to eliminate this requirement but for now I recommend that you make all purchases for your business with a debit card or a credit card as of January 1, 2012.
Your W2 for 2011 that you receive in January 2012 will show the amount your employer is paying for your health insurance. DESPITE ALL THE INTERNET RUMORS, THIS DOES NOT MEAN YOU WILL BE TAXED FOR THAT AMOUNT AS INCOME IN 2011. This information is being included on the W2 for your information much the same as other information is included like sick leave usage and retirement contributions. Beginning in 2018 "cadillac" health plans will be taxed. See additional information under the 2018 heading.
2013
A number of changes to the MediCare system will occur this year to keep MediCare solvent.
Individuals will pay an additional 0.9% Medicare tax on wages and self-employment income on amounts earned above $250,000 for a couple, $125,000 for those who are married but filing separately and $200,000 for all others. Employers will be required to withhold at the 0.9% rate on an employee's salary in excess of $200,000 without regard to a spouse's income. Any underpayment or overpayment will be dealt with on the income tax return. Two examples - One spouse makes $225,000, the other spouse doesn't work, combined income is less than $250,000 on their joint return. The 0.9% in additional MediCare taxes that have been withheld because the working spouse made more than $200,000 will be refunded when the couple's tax return is filed. Second example - Each spouse makes $150,000, neither employer withholds the additional 0.9% MedidCare tax, combined income is more than $250,000 on their joint return. The couple is obligated to pay the additional 0.9% MediCare tax on $50,000 - the amount their income exceeds the $250,000 threshold - as part of their tax bill on April 15, 2014..
Under current law, MediCare taxes are assessed only on earned income. Beginning in 2013 a MediCare tax will also be imposed on the investment income of individuals, estates and trust. For individuals the tax will be 3.8% of net investment income or the excess of modified adjusted gross income over the threshold amounts, whichever is less. For estates and trusts, the additional tax will be 3.8% of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest estate and trust income tax bracket begins, whichever is less. Investment income is defined as income from dividends, interest, annuities, royalties, rents and gains from the sale of property such as stocks. Investment income does not include tax-exempt bond interest, distributions from retirement plans and IRAs, veterans' benefits or gain from the sale of a principal residence.
The threshold for claiming medical expenses as an itemized deduction will increase from 7.5% of adjusted gross income to 10% of adjusted gross income. There is a temporary reprieve for seniors - for tax years 2013 through 2016 the 7.5% floor continues to apply for individuals who reach the age of 65 before the end of the tax year. For married couples filing jointly, only one spouse needs to be 65 in order for the lower threshold to apply.
The amount that can be contributed to a cafeteria plan will be reduced to $2500 and will be adjusted for inflation in subsequent years.
2014
THE YEAR EVERYONE IS REQUIRED TO HAVE HEALTH INSURANCE.
Eligible familes - those with household incomes of at least 100% but not more than 400% of the poverty line who are not covered by an employer's insurance plan - will receive a tax credit to help subsidize the purchase of health insurance through a state health benefit exchange.
A penalty will be imposed for not having health insurance and will be paid as part of an individual's tax return.
Large employers will be charged a penalty if they don't offer affordable basic health insurance to their employees. A large employer is one with more than 50 employees.
The details of how these provisions will be implemented are still being worked out and there will be more information available as regulations are created to implement the Health Care Act.
2018
An excise tax of 40% will be imposed on the amount by which an employee's health coverage premiums exceed certain threshold amounts. This is the so-called "Cadillac Tax". The threshold amounts are $10,200 for single coverage and $27,500 for family coverage with an additional $1650 and $3450, respectively, for covered individuals 55 and over and individuals in high-risk occupations. These amounts will be adjusted for inflation and, in fact, are "pre-adjusted for inflation" meaning the threshold amounts are based on expected inflation rates by 2018. If those rates don't materialize, the thresholds will be ajusted.
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