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2013 CCH Whole Ball of Tax
A Checkup on Changing Health Care Rules Could Help Taxpayers Avoid Surprises, CCH Says
(RIVERWOODS, ILL., January 2013) – Upheld as constitutional by the U.S. Supreme Court last year, the Patient Protection and Affordable Care Act (Affordable Care Act) is now moving toward full implementation. For 2013, this includes both additional health provisions as well as the first tax ramifications of the law affecting many taxpayers, according to CCH, a Wolters Kluwer business and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com).
“Most people’s experience with the direct financial aspects of the Affordable Care Act has been limited so far,” said CCH Senior Federal Tax Analyst John W. Roth, JD, LLM. “During benefits enrollment for 2013, employees would have begun to see limits on FSAs and starting this year, millions more will need to understand how the law could impact their tax situation – from high income earners subject to new taxes to moderate income earners who may find they are no longer eligible for medical-related deductions.”
Below, CCH provides an overview of tax-related provisions of the Affordable Care Act now in effect or coming shortly.
2013 Brings New Taxes on High Income Taxpayers’ Wages, Investment
Two of the most significant Affordable Care Act tax implications for individuals went into effect at the start of 2013, taxing both wages and investments for higher income taxpayers.
“The new taxes are not widely understood and individuals can easily and inadvertently find themselves out of compliance – and facing penalties in addition to the taxes – unless they do some careful planning,” said Roth.
- Additional 0.9-percent Medicare tax. In previous years, the employee-share of Medicare tax was 1.45 percent of their covered wages (2.9 percent for self-employed). As of 2013, employees will pay an additional 0.9-percent Medicare tax on covered wages exceeding $200,000 for single filers and $250,000 for joint filers. Employers are required to withhold the tax from wages paid to an employee in excess of $200,000.
Complications can quickly arise, however, particularly for married couples filing jointly where neither spouse makes more than $200,000 but their combined income exceeds $250,000. Similarly, individuals who work at more than one job where wages don’t exceed the $200,000 limit, but combined they do. In such instances, an employer is not required to withhold income. If an employer is not withholding the income, then affected taxpayers are required to file estimated quarterly taxes or be subject to possible tax penalties for underpayment of tax.
“Early this year, taxpayers should sit down and figure out how much they expect to earn this year – in wages as well as tips, commissions, bonuses and other types of pay,” said Roth. “If they expect their combined income, or their income from combined jobs, will exceed the threshold, they need to either begin paying estimated taxes or, a simpler solution, instruct their employer to make additional withholdings. This way they can avoid both filing estimated taxes and penalties.”
Self-employed taxpayers also are subject to the added 0.9-percent Medicare tax on earnings above $200,000 as single filers, $250,000 as joint filers and should adjust their estimated tax payments.
- New 3.8-percent Net Investment Income tax (NII). The 3.8-percent NII tax applies to taxpayers with net investment income whose modified adjusted gross income (MAGI) exceeds $200,000 for single filers and $250,000 for joint filers. The NII tax is applied to the lesser of the excess of their MAGI over the filing status threshold amount or their net investment income.
Net investment income includes gross income from interest, dividends, annuities, royalties and rents as well as proceeds from real estate and income from partnerships. However, while some people were concerned that selling their principal residence would trigger the NII tax, that’s generally not likely. But it could be the case with second homes or investment properties.
“A married couple has a $500,000 capital gains exclusion on the sale of their principal residence, therefore, their home would have to have appreciated more than that and they would have to also exceed the MAGI requirements in order to be subject to the NII tax on any gains,” said Roth.
For most people, interest earned on their bank accounts, dividends realized on stock investments paid through their brokerage account or mutual funds and corporate dividends will be the most common investment income. Many corporations made dividend distributions before 2012 year-end in anticipation of the NII tax as well as the concern that dividends would be taxed as ordinary income starting in 2013. Dividends received in 2012, would help investors minimize their exposure to the 2013 taxes.
“Many older individuals who rely on interest and dividend income in their retirement potentially may be subject to the NII tax. Many of these individuals have already begun to minimize their exposure to the NII tax by shifting to tax-exempt investments, such as municipal bonds whose interest is excluded from net investment income for NII tax purposes,” said Roth. “Those who have not done so already should look at their holdings in early 2013 to make sure they understand how the NII tax could affect their income.”
CCH’s Tax Briefing, Analysis of Post-2012 Net Investment Income and Additional Medicare Taxes, provides additional detail and can be accessed here.
Higher Medical Expense Deduction Limits Availability; Certain Devices Now Taxed
- 10-percent threshold for unreimbursed medical expense deduction. As in the past, in order to qualify for the medical deduction, a taxpayer must have total itemized deductions exceeding the standard deduction. Beginning with the filing of their 2013 income tax return, total unreimbursed medical deductions must now exceed 10 percent of adjusted gross income (AGI). This is up from 7.5 percent of AGI for the 2012 tax year. The lower 7.5-percent threshold, however, stays in effect for 2013 through 2016 for taxpayers and/or their spouse who are 65 years of age or older before the end of the tax year.
One tax break provided by the Affordable Care Act allows parents who itemize on their federal tax return to include medical expenses for children under age 27 as part of calculating their medical expense deductions. Parents can do so regardless of whether or not the child (up to age 25) is covered under the parent’s health insurance plan.
Medical expense deductions can include a variety of other medical-related costs, such as medical and long-term care insurance premiums not covered by an employer. Additionally, transportation costs to get medical care also can be allowable medical expenses.
However, some costs clearly can’t be deducted as medical expenses – and some can, but only under certain circumstances. For example, costs for:
‒Teeth whitening is not an includible medical expense;
‒Marijuana and other controlled substances are not includible as medical expenses at the federal level; even though legalized by some states; and
‒Weight loss cost can be deducted if it is a treatment for a specific disease diagnosed by a physician (such as obesity or hypertension), but can’t be included as a medical expense for someone just looking to improve their appearance.
2.3-percent medical device excise tax. Also potentially indirectly affecting taxpayers as part of the Affordable Care Act is a tax on certain medical devices equal to 2.3 percent of their sale price starting in 2013, which manufacturers may decide to pass on in terms of higher costs to consumers. Certain retail devices are exempt, such as eyeglasses, contact lenses and hearing aids. The House of Representatives passed a bill to repeal the excise tax; however, the Senate did not take it up.
Changes to FSAs and HSAs
The Affordable Care Act also has affected taxpayers’ medical-related savings accounts.
- Flexible Spending Accounts (FSAs). Anyone who enrolled in an FSA as part of their 2013 annual benefits enrollment period last fall knows that there now is a maximum $2,500 limit on FSA contributions; previously there was a $5,000 limit. FSAs allow employees to pay for unreimbursed medical costs including co-payments and prescriptions, but not health care premiums, for themselves and their family on a pre-tax basis.
- Health Savings Accounts (HSAs). Taxpayers with high-deductible health plans can make pre-tax contributions and tax-free distributions from their HSA for qualified medical expenses for themselves and their family. Distributions for expenses that are not qualified are treated as taxable income and there is a 20-percent penalty for taking non-qualified distributions. For 2013, the maximum contribution limit is $3,250 ($3,100 for 2012) for individuals and $6,450 ($6,250 for 2012) 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 by someone enrolled in Medicare.
More Information on W-2 – Preparing for Mandatory Coverage
- Added W-2 health care reporting. Most employees will see the amount of their employer-provided health benefits on their W-2s for 2012. The amount is reported in Box 12 of the W-2 using the code “DD.” Initially, reporting was required for all employers, but the IRS last year provided a reprieve for small businesses. Until further guidance is provided, employers with fewer than 250 W-2s are not subject to mandatory reporting.
“This reporting helps both the IRS identify which taxpayers have health care coverage and which employers are providing coverage,” said Roth. “It also makes the employee better understand the costs of their health benefits and to compare this coverage with other coverage that may be available privately or through the health exchanges as they begin to operate.”
- Penalties related to health insurance coverage. Starting in 2014, when the health exchanges are to be operational, individuals will face a penalty for failing to obtain health insurance. In addition, large employers will be required to provide access to health insurance for their employees.
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. Celebrating its 100th anniversary in 2013, CCH has served tax, accounting and business professionals since 1913. Among its market-leading solutions are the ProSystem fx® Suite, CCH Integrator™, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us 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. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.
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