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Visit the Whole Ball of Tax site often as new releases and other updates will be posted
throughout the tax season.

Wolters Kluwer, CCH provides special CCH Tax Briefings on key topics at: CCHGroup.com/Legislation.

• CCH Tax Briefing:
  2013 Tax Year-in-Review


• CCH Tax Briefing:
  IRS Releases Final Regulations on Net Investment Income and Additional Medicare Taxes


• CCH Tax Briefing:
  Analysis of Comprehensive Repair/Capitalization Final Regulations


• CCH Tax Briefing:
  IRS Guidance on Same-Sex Marriage

Wolters Kluwer, CCH Examines Latest Health Care Taxes, Impact on Returns

(RIVERWOODS, ILL., January 2014) – While health care options, government website issues and heated political debate over the Affordable Care Act (ACA and commonly referred to as “Obamacare”) continue grabbing headlines – taxpayers, depending on their income levels, will be getting more familiar with health care-related terms and a couple of new taxes that went into effect last year as they prepare their returns in 2014. CCH, a part of Wolters Kluwer and leading global provider of tax, accounting and audit information, software and services (CCHGroup.com), analyzes the taxes and provisions for healthcare reforms and medical tax deductions.

The 3.8-percent Net Investment Income (NII) Tax (applying to net investment earnings) and the 0.9-percent Additional Medicare Tax (applying to earned income) were introduced in the ACA. The IRS issued final guidance on both late last year (outlined in this December 2013 CCH Tax Briefing). Each tax is designed to fund different areas of health care reform – based on income thresholds.

NII Filing Status Thresholds for 2013 Taxes

Trusts are also subject to NII Taxes above a threshold of $11,950 for 2013.

“Overall, the general framework of the NII Tax remains unchanged, but the IRS did listen to concerns from taxpayers and practitioners relating to the administration of the NII tax,” said Wolters Kluwer, CCH Senior Federal Tax Analyst, George Jones, JD, LLM. “In some areas, however, the IRS had little room to make changes. For example, the threshold amounts for triggering the NII Tax are set by statute and are not indexed for inflation. The IRS also did not, contrary to many requests, provide an angel’s list of income or deduction items that are excluded from the calculation of NII.”

Medical Expense Tax Deductions

Also for 2013, you can deduct qualifying medical expenses from your federal tax return – only if the total amount is greater than 10 percent of your adjusted gross income (AGI), which is reported on line 38 of a Form 1040 tax return. That’s up from 7.5 percent for the 2012 tax season, but the 7.5-percent threshold still applies to taxpayers age 65 or older by the end of the year.

Additional Background: Health Care Taxes

• The 3.8-percent Net Investment Income 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, stocks, royalties and rents as well as most proceeds from real estate and passive participation in partnerships. However, while some people were concerned that selling their principal residence would trigger the NII tax, that’s generally not likely because of the generous capital-gain exclusion available to most homeowners. But it could be the case with second homes or investment properties.
  

  “For instance, 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 from the home sale,” said Wolters Kluwer, CCH Senior Federal Tax Analyst John W. Roth, JD, LLM.
  

  For most people, interest earned on their bank accounts, capital gains from the stock market, 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.
  

  “Older individuals who rely on interest and dividend income in their retirement potentially may be especially exposed to the NII tax. In 2013, many began 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.

• The 0.9-percent Additional 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). For the 2013 tax year, employees will pay an additional 0.9-percent Additional 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 taxes.

  If an employer is not withholding the tax, then affected taxpayers are required to file estimated quarterly taxes or be subject to possible tax penalties for underpayment of tax.
  

  Self-employed taxpayers also are subject to the 0.9-percent Additional Medicare Tax on earnings above $200,000 as single filers, $250,000 as joint filers and should adjust their estimated tax payments.

ACA Child Medical Deductions

One tax break provided by the ACA, since 2010, 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 is covered under the parent’s health insurance plan (eligible to be covered up through age 25).

Qualifying, Non-qualifying Medical Deductions

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.
• 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 ACA is a tax on certain medical devices equal to 2.3 percent of their sale prices. 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 in the prior Congress; however, the Senate did not take it up. The Senate passed a non-binding repeal resolution in the current Congress.

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 a health FSA as part of their 2013 annual benefits enrollment period last fall knows that there is a maximum $2,500 limit on health FSA contributions. 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. Due to a change made in 2013 to the ‘use-or-lose’ rule, employers can now structure their FSAs to allow an employee to carry over up to a $500 of unused funds into the following year.

• 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. 

Penalties Related to Health Insurance Coverage 

According to the U.S. government website, Healthcare.gov, the amount of the penalty to be paid for not having health insurance in 2014 is calculated two ways – with the higher amount to be paid:

• One percent of the non-health insured’s yearly household income. The maximum penalty would be the national average yearly premium for a bronze-level health plan.
• $95 per person per year ($47.50 per child under age 18).The maximum annual penalty per family using this option is $285.

The amount increases in 2015 to 2 percent of income or $325 per person and to 2.5 percent of income or $695 per person in 2016. Percentages and penalty fees will be adjusted for inflation after 2016.

About CCH, a part of Wolters Kluwer

CCH, a part of Wolters Kluwer (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. Among its market-leading solutions are The ProSystem fx® Suite, CCH Axcess™, 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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