As you all know by now, the US Supreme Court upheld a key provision of the federal health care reform law, known as the individual mandate or minimum essential coverage provision, which requires virtually all U.S citizens to obtain health care insurance or pay a penalty. This penalty for not obtaining health insurance may reasonably be characterized as a tax. Therefore, the IRS becomes the gatekeeper regarding penalties and credits that are a result of this mandate. Along with these provisions there are several tax impacts that I will focus on here.
Some of the tax related provisions of this act and the American Taxpayer Relief Act of 2012 that are effective for 2013 may affect you and have a bearing on your 2013 tax return are as follows:
- Modified threshold for valuing medical expense deductions-Previously we have been able to deduct medical expenses as itemized deductions in excess of 7.5% of our adjusted gross income. That amount has now been increased to 10% from 7.5%. However, for those individuals over 65 the 7.5% threshold continues to apply.
- If you have an employer whom has more than 250 employees, then they will be required to disclose on your W-2 the value of the medical benefits that you have received for the year.
Certain unearned income of individuals, trusts, and estates is subject to a surtax on “unearned income” (also called “unearned income Medicare contribution tax” or “net investment income tax”). This 3.8% surtax will be taxed on net investment income in excess of $200,000 for individuals, $250,000 for married filing jointly taxpayers, or $125,000 for those married filing separately.
In general, net investment income includes, but is not limited to interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses that are considered passive activities for tax purposes, and businesses involved in trading financial instruments or commodities. The net investment income is reduced by certain expenses properly allocable to the income. This also applies to the taxable gain on the sale of a personal residence in excess of the allowed gain exclusion amount of $250,000 for individuals and $500,000 for married couples.
An additional 0.9% Medicare tax will be imposed on taxpayer’s wages in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).
This tax is in addition to the regular Medicare tax rate of 1.45%. Therefore, for incremental income in excess of $200,000 the Medicare tax that will be withheld will be 2.45%. This increase applies to self employment income as well. Employers are required to withhold this amount on all wages in excess of $200,000 despite the filing status. Any adjustments that will be taken will be done on the taxpayer’s year- end tax return.
- As a result of the American Taxpayer Relief Act of 2012, a 39.6% rate will apply to taxable income above $400,000 for an individual and $450,000 for joint filers.
- Also effective for 2013, the capital gains rate will permanently rise to 20% for those taxpayers with taxable income exceeding $400,000 for individual filers and $450,000 for joint filers.
- In addition, the new law reinstates the phase-out of itemized deductions and personal exemptions with a starting threshold of $250,000 for individual filers and $300,000 for joint filers.
Beginning in 2014, all non-exempt US citizens and legal residents will have to maintain minimum essential health insurance coverage or pay a penalty. We’ll discuss some of these penalties, credits, cost-sharing assistance and exemptions in futures updates.
I hope you find this concise and helpful. Please feel free to contact me regarding any questions you may have regarding any of this.