Federal Health Care Reform and Taxes

Health care reform legislation that was recently passed by Congress may affect your taxes as well as your health coverage. Here are some of the provisions of the new law that could affect your tax bill through 2013. Additional major changes that take effect in 2014 or later will not be discussed here.

2010

If you plan on working on your tan at an indoor salon this year, it may cost you more. Beginning July 1, 2010, the new health care bill applies an excise tax of 10% to indoor tanning services.

Some small businesses will get help paying for employee health insurance beginning in 2010. That's when employers with 25 or fewer full-time employees and an average annual wage of less than $50,000 may qualify for a tax credit of up to 35% if they pay at least half of their employees' health insurance premiums. The credit is available for up to six years, from 2010 through 2013 and then for any two years after that. The maximum credit is 35% through 2013 and 50% in 2014 and beyond.

2011

More restrictive rules for Health Savings Accounts and Flexible Spending Accounts begin to take effect in 2011, when the penalty for nonqualified deductions from Health Savings Accounts doubles to 20% and funds in Health Savings Accounts, Flexible Spending Accounts or health care reimbursement plans can no longer be used to pay for over-the-counter medications.

Also, beginning in 2011, health care reform requires businesses to show the value of health care benefits provided to employees on their W-2 forms. Although this will not affect employee income or taxes, it will give employees a clearer picture of the financial value of health benefits provided by their employers.

2013

If you use a Flexible Spending Account for health care expenses, are a high earner or itemize deductions, provisions in the new health care legislation could boost your taxes beginning in 2013.

An annual $2,500 Flexible Spending Account contribution limit goes into effect in 2013. Currently there are no federally mandated contribution limits, although some companies impose their own. This annual limit will be indexed for inflation in subsequent years.

Also, some high-income individuals and couples will begin to pay more Medicare taxes in 2013, including a Medicare tax premium of 0.9% on income of more than $200,000 for individuals and $250,000 for couples. This additional tax will boost the Medicare tax on this income to 2.35% from 1.45%.

High earners (individuals with modified adjusted gross income of more than $200,000 and couples with modified adjusted gross income of more than $250,000) also will pay an additional 3.8% Medicare tax on unearned income such as dividends, interest, realized capital gains, rent, royalties, and some passive activity income.

Itemized deduction limits on health care expenses will be raised beginning in 2013 from 7.5% of adjusted gross income to 10% of adjusted gross income. Some individuals aged 65 or more will get a temporary exemption from these higher limits through 2016.

2014 and Beyond

In 2014, states must start offering health insurance exchanges and in that year or later other significant changes go into effect that may affect individual and business taxes. These changes will not be discussed here.

Many of these tax law changes are complicated, so be sure to check with your tax advisor concerning their application to you.

Sources:

Kiplinger's Personal Finance Magazine, articles.moneycentral.msn.com, Health care reform: When and where to expect higher taxes - MSN Money

economy.cbh.com, The New Health Insurance Law and Your Money - Consumerism Commentary

Ryan J. Donmoyer, www.businessweek.com, Hew Taxes for Health Care Help Obama "Spread the Wealth Around"- BusinessWweek

Catherine Clifford, money.cnn.com, How the small business health care tax credit works