How Health Care Reform Can Affect Your Taxes

July 22, 2010 – 1:19 pm

Earlier this year President Obama signed the new health care bill into law. There are several provisions of this health care reform that will become effective over the next several years. Here are a few that may have a significant impact on you and your clients.

Small Business Health Care Premium Credit –Business Provision Effective 2010
In order to qualify for this credit, small businesses must have 25 or fewer full-time employees, have an annual employee payroll on average of under $50,000, and pay premiums for health insurance for its employees.

Likewise, small businesses with up to 10 employees and annual wages averaging $25,000 or less are eligible to receive 100% of the credit. The credit begins to phase out as the number of employees surpasses 10 and the amount of average annual wages exceeds $25,000.

Adoption Credit – Individual Provision Effective 2010
The current adoption credit is $12,170. Under the new health care law, this amount will increase to $13,170 and it will become a fully refundable credit. The sunset period of the adoption credit is also postponed to December 31, 2011.

FSA/HSA Qualified Medical Expense Definition Change–Individual Provision Effective 2011
Only prescription drugs and insulin will be eligible for reimbursement through a flexible spending account (FSA) or health savings account (HSA) beginning in 2011. For FSA and HSA purposes, qualified expenses will no longer include over-the counter medications or first-aid and other medical items.

HSA Penalty for Non-qualified Withdrawals – Individual Provision Effective 2011
The penalty for non-qualified distributions from an HSA will be increased from 10% to 20%.

Medical Expense Deduction Threshold Increase – Individual Provision Effective 2013
The threshold for deducting medical expenses on Schedule A will increase from 7.5% of the adjusted gross income to 10% for 2013 through 2016. However, the 7.5% limitation remains in place for individuals 65 and older by the end of the year.

Medicare Tax Increase – Individual Provision Effective 2013
The employee portion of Medicare tax will be increased from 1.45% to 2.53% for taxpayers whose earned income is greater than $200,000 ($250,000 for MFJ). If any portion of the tax is not collected by the employer via withholdings, the employee must pay the tax through his/her tax return. This also applies to self-employment income.

Additional Tax on Net Investment Income – Individual Provision Effective 2013
Taxpayers with high income will be subject to a 3.8% tax on net investment income. The tax will be limited to the lesser of 3.8% times the net investment income or the taxpayer’s modified adjusted gross income, according to the applicable threshold. For MFJ, the threshold is $250,000; for MFS, the threshold is $125,000, and for all other filing statuses, the threshold is $200,000.

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