Health Care Reforms — Individual Income Tax Consequences
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As you know, beginning in 2014, the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 and other laws, collectively the Affordable Care Act, requires individuals to pay a penalty if they do not obtain health insurance that is “minimum essential coverage” for themselves and their dependents.
Well, that penalty is just one of many tax consequences of the Affordable Care Act that affects you.
• If your employer-sponsored health plan covers dependents, you may carry your adult children on your health plan tax-free until they reach age 26 without meeting the tax Code’s criteria for dependents and, if your plan allows it, you may keep them on your plan through the calendar year in which they turn age 26 without imputing income tax to you. If your group health plan is “grandfathered,” it must cover these adult children only if they are not otherwise eligible to enroll in an employer-sponsored health plan.
• If you are self-employed (or a 2% shareholder of an S corporation), your ability to deduct 100% of the amount paid during the taxable year for health insurance coverage extends to any child who was under age 27 at the end of the year.
• If you are a retiree whose former employer provides medical benefits through a pension or annuity plan, your children who have not attained age 27 at the end of the year may be covered under the plan.
• You must have a prescription to use your flexible spending account or health reimbursement arrangement for over-the-counter medicine and drug (other than insulin) expenses incurred after 2010.
• Withdrawals from an Archer MSA or an HSA that are not for qualified medical expenses are includible in income and are subject to an additional tax unless an exception applies. For distributions made after 2010, that additional tax increased from 15% to 20% for an Archer MSA or from 10% to 20% for an HSA.
• If your sole proprietorship or partnership has 25 or fewer employees making an average of no more than $50,000 and you provide health coverage for non-family member employees, you may be eligible to claim a credit for those employees if you pay at least 50% of their premium costs.
• For taxable years beginning after 2012, your deduction for unreimbursed medical expenses applies to amounts in excess of 10% of adjusted gross income (instead of 7.5%); however, if you are age 65 or older at the end of the year it remains at 7.5% before 2017.
• Starting with your 2012 Form W-2 (which you receive in 2013), your employer will have to provide you with information about the costs of employer-sponsored health care coverage. This requirement does not change the taxability of that coverage.
• In plan years beginning after 2012, your annual pre-tax contributions to a health flexible spending account offered under a cafeteria plan are capped at $2,500.
• Beginning in 2014, you can purchase health care coverage through a health exchange. If you must pay health care premiums, you purchase your coverage through an exchange, and your household income is 100% to 400% of the poverty level for your family size, you may be eligible for a refundable premium assistance tax credit to help you pay the premiums. Another option allows you to obtain a cost-sharing subsidy to reduce your out-of-pocket expenses.
• If you are a highly compensated individual, your employer or insurer may want to change your health coverage to minimize its taxes. If you receive health coverage through an insured group health plan and that plan discriminates in your favor, once IRS guidance is released and takes effect, your plan may have to pay an excise tax of $100 per day per individual against whom it has discriminated. Beginning in 2018, your employer or insurer generally will have to pay an excise tax if the value of your employer-sponsored coverage is more than $10,200 for you or more than $27,500 for your family.
Other changes made by the Affordable Care Act are not related to your health care options but may impact you. For example:
• Maximum income exclusions for employer-provided adoption assistance were increased for 2010 and extended to 2011. In addition, for those years, the adoption tax credit was temporarily refundable and the maximum tax credit amount was increased for all adoptions. If you qualified but did not take advantage of these tax benefits, we can look into amending your returns.
• If you are a health professional who receives payments under a state student loan repayment or loan forgiveness program that is intended to increase the availability of health care services in underserved areas, those amounts are not income to you.
• If you use indoor tanning services, you must pay a tax of 10% of the amount paid for the services.
• Beginning in 2013, you will have to pay a Medicare tax that is the lesser of 3.8% of net investment income or any excess of modified adjusted gross income over $250,000 if you file a joint return, $125,000 if you are married but file separately, or $200,000 for another filing status.
• The Affordable Care Act also changed some tax penalty laws. The accuracy-related penalty applies to reportable transaction understatements that are attributable to a transaction that lacks economic substance, is doubled (to 40%) for undisclosed economic substance transactions, and cannot be avoided through a reasonable cause exception. The reasonable cause exception also does not apply if you claim charitable deduction property and make a gross valuation overstatement on your return. In addition, a doubled penalty also applies for understatements due to undisclosed foreign financial assets.
• Starting in 2013, if your wages (or self-employment income) exceed $200,000 ($250,000 for a joint return; $125,000 if married filing separately), your employer must collect from you, or if you are self-employed you must pay, an extra 0.9% on the employee portion of the hospital insurance tax.
These are just a few of the ways that the Affordable Care Act may affect you. Please contact me if you would like to discuss these important matters.