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2012 CCH Whole Ball of Tax
Tax Ramifications of Health Care Reform Continue to Increase
(RIVERWOODS, ILL., January 2012) – While the future of the Patient Protection and Affordable Care Act (Patient Protection Act) continues to be challenged in court, many provisions affecting taxes are currently in affect and taxpayers need to understand these as they begin preparing their 2011 tax returns and plan for 2012 and beyond, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).
“Each year brings added tax ramifications related to health care reform, building up to 2013 and 2014 when most tax aspects will be fully implemented, assuming the law remains in effect,” said CCH Senior Federal Tax Analyst John W. Roth, JD, LLM .
Below, CCH explores tax-related provisions of the Patient Protection Act currently in effect and those being implemented in the next few years.
Covering Adult Children Adds to Opportunities for Claiming Medical Deductions, Often for Both Federal and State Purposes
Already in effect under the Patient Protection Act, parents who itemize on their federal tax return can take deductions for medical expenses for children under age 27, regardless of whether or not the child is covered under the parent’s health insurance plan (children can be covered on their parents’ plan through age 25).
To qualify for the medical deduction, taxpayers must have:
- Total itemized deductions exceeding the standard deduction . For 2011, the standard deduction is $11,600 for married couples filing jointly and $5,800 for single filers; and
- Total unreimbursed medical deductions exceeding 7.5 percent of adjusted gross income (AGI). Under the Patient Protection Act, this 7.5 percent threshold for itemized deductions will increase to 10 percent, but not until 2013.
A variety of medical-related costs can be deducted and the IRS updates the list of deductible expenses regularly. For example, last year saw expenses for breast pumps and sex reassignment surgery recognized as deductible medical expenses. Beyond direct medical costs, deductions also can include medically necessary modifications to someone’s home, to the extent they don’t increase the home’s value.
Generally, states tend to follow federal law when it comes to exempting or taxing healthcare benefits. However, some states already have established carve outs from the federal law related to covering dependents.
“The AGI for taxpayers in states that conform to the federal law will be lower as a result of this provision of the Patient Protection Act, meaning a lower tax base,” said CCH State Tax Analyst Kathleen Thies, JD. “As a result, some states are looking at carve outs from the federal law related to covering dependents.”
Currently, state law related to coverage of dependents varies from federal law in many instances. For example, Iowa allows all taxpayers to deduct 100 percent for health and dental insurance premiums. California allows the exclusion and deduction to be claimed on behalf of reimbursements and premiums associated with a registered domestic partner and the individual’s dependents. Additionally, New Jersey allows taxpayers to take a deduction for medical expense in excess of 2 percent of gross income compared to the federal 7.5 percent; however, it does not allow an exclusion for reimbursements for employer-provided health plans or deductions for medical expenses for adult children who are not dependents.
Changes to Tax-advantaged Medical-related Savings Accounts
Additionally, taxpayers can take advantage of medical-related savings accounts, however, changes are now in effect or planned for these under the Patient Protection Act:
- Flexible Spending Accounts (FSAs) . FSAs allow employees to pay for un-reimbursed medical costs including co-payments and prescriptions, but not health care premiums, for themselves, their spouse and dependents on a pre-tax basis. There currently is no set limit on how much can be contributed, although employers can determine this if they choose. Under the Patient Protection Act, starting in 2011, FSA contributions could no longer be used to cover over-the-counter medications, and starting in 2013, there will be a $2,500 limit on FSA contributions.
- Health Savings Accounts (HSAs). HSAs provide tax benefits for individuals with high-deductible health plans, including pre-tax contributions and tax-free distributions for qualified medical expenses for themselves, spouse and dependents. Distributions for expenses that are not qualified are treated as taxable income. Additionally, starting in 2011, the penalty for taking a non-qualified distribution doubled to 20 percent. For 2012, the maximum contribution limit is $3,100 ($3,050 for 2011) for individuals and $6,250 ($6,150 for 2011) for families. Those who reach age 55 by the end of the tax year are eligible for a catch-up contribution of $1,000. Contributions cannot be made after age 65.
Additional Provisions Kicking in as of 2013 and Beyond
Looking ahead to other significant tax implications for individuals of the Patient Protection Act that will come into effect in 2013 and beyond:
- Additional Medicare taxes. Starting in 2013, there will be an additional 0.9 percent Medicare tax on earned income and 3.8 percent Medicare tax on investment income for taxpayers with AGI over $200,000 for single filers and $250,000 for joint filers ($125,000 if married filing separately).
"Individuals relying on interest and dividends, should take time in 2012 to determine how the new Medicare tax will affect their current investments and whether they should be shifting more of their assets to tax-free investments, such as municipal bonds,” said Roth.
- Added W-2 Health Care reporting. This includes reporting the amount of healthcare benefits an employer paid. While not required until 2013 for the 2012 tax year, some organizations have already begun including the added information on W-2s for 2011, although it has no effect on 2011 federal taxes. The amount is reported in Box 12 of the W-2 using a new code “DD”. In future years, the new detail will help the IRS identify which taxpayers have health care coverage and which employers are providing coverage. In addition to the requirement that individuals have health insurance starting in 2014, large employers also will be required to provide access to health insurance for their employees.
- Penalties and credits related to health insurance coverage. Starting in 2014, individuals will face a penalty for failing to obtain health insurance; however, there also will be a premium assistance credit to help certain taxpayers. The Supreme Court case, which includes consideration of the individual mandate for coverage, however, could change this landscape; arguments are scheduled for the end of March with a decision expected in June or July.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Follow us now on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands.
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