Tax aspects of health care law
The new health care law includes sweeping changes for both employers and individuals. Following is a brief summary of several key tax-related provisions.
Coverage for individuals: After 2013, any individual not eligible for Medicare or Medicaid must obtain minimum essential coverage or pay a nondeductible penalty based on a flat dollar amount or a percentage of household income. The new law also provides coverage subsidies to qualified lower-income individuals through premium assistance tax credits and reduced cost-sharing.
Employer requirements: Beginning in 2014, an employer failing to offer minimum essential coverage in any month for an eligible full-time employee will be liable for an additional tax. The tax equals 1/12th of $2,000 times the number of all full-time employees. This penalty applies to employers with 50 or more workers, but the first 30 workers are subtracted from the calculation.
Small businesses: Beginning in 2010, a qualified small business may use a special tax credit to offset employer-provided coverage. A “small business” is generally one with no more than 25 employees and average annual wages of less than $50,000 per employee. A bigger credit is available to employers with no more than 10 employees and average annual wages of less than $25,000.
Medicare taxes: Beginning in 2013, an additional 0.9% Medicare tax is imposed on wages of unmarried individuals with earned income above $200,000 and $250,000 for married joint filers; and an additional 3.8% Medicare tax applies to “net investment income” received by unmarried individuals with a modified adjusted gross income (MAGI) above $200,000 and $250,000 for joint filers.
Tax on health insurance plans: Beginning in 2118, insurers will have to pay a 40% excise tax if the annual premiums for a health insurance plan exceed $10,200 for individual coverage and $27,500 for family coverage.
Medical deductions: Under current law, an individual may deduct only qualified medical expenses in excess of 7.5% of adjusted gross income (AGI). Beginning in 2013, the new law generally raises this “floor” to 10% of your AGI.
However, an individual (and spouse) who is age 65 or older is temporarily exempt from this increase for tax years beginning after 2012 and before 2017.
Flexible spending accounts: The new law caps the annual amount of health care FSA contributions at $2,500, beginning in 2013 (indexed for inflation after 2013).
Adoption credit: The new law makes the adoption credit refundable, retroactively raises the dollar limit on the credit for 2010 from $12,170 to $13,170 and enhances the credit for adopting special needs children.
Information reporting: Beginning in 2012, a business must file information returns for annual payments of $600 or more to any corporate or noncorporate recipient (other than tax-exempt entities).
Of course, this is only a general overview of several important tax provisions in the massive health care legislation. The new health care law will have far-reaching effects for individuals and business owners. To find out exactly how the new law affects you, your family and your business, call us and we will be glad to provide you with an analysis of your situation.
Washington Reforms Health Care And Taxes
Sunday’s night’s health care bill will go down as one of those once-in-a-generation accomplishments. I’m not here to debate the merits of the bill – historians will still be doing that decades from now. But it’s important to point out some important tax changes included in the bill and the companion “reconciliation” bill now before the Senate. (Just how important are they? Well, the Congressional Budget Office says the IRS will need $10 billion and 17,000 new employees to enforce its share of the new rules!)
Here are some of the key tax provisions:
- Starting immediately, certain small businesses with less than 10 employees will get a 35% credit for the cost of providing employee health benefits.
- Starting in 2011, employers will have to report the value of health benefits on Form W2.
- The penalty tax for Health Savings Account distributions not used for health care expenses doubles from 10% to 20%. This will discourage using HSAs for supplemental retirement savings.
- Starting in 2013, the 7.5% floor for deducting medical and dental expenses climbs to 10% (unless you or your spouse are 65 or older, in which case it remains at 7.5% until 2016).
- Healthcare flexible spending account contributions are capped at $2,500 per year.
- Starting in 2014, businesses with more than 50 employees will have to offer heath benefits or pay a penalty of $750/employee.
The reconciliation bill includes one more unwelcome surprise. Currently, the Medicare tax is limited to 2.9% of earned income. The reconciliation bill imposes an additional Medicare tax of 0.9% on earned income above $200,000 (individuals) or $250,000 (families). It also adds a 3.8% “Unearned Income Medicare Contribution” on investment income – specifically, interest, dividends, annuities, royalties, capital gains, and rents – for taxpayers with Adjusted Gross Income above those same thresholds. Those new levies would take effect in 2013.
The complete bill is 1,018 pages, so it’s going to take some time to analyze. But we’ll be paying close attention as details become available. In the meantime, call us with any questions!
Benefit from Roth “ordering rules”
For the first time ever, taxpayers can convert a traditional IRA to a Roth, regardless of their annual income. Previously, conversions weren’t allowed for taxpayers with a modified adjusted gross income (MAGI) over $100,000.
But nothing has changed in the rules for Roth IRA distributions. Unless payouts are treated as “qualified distributions,” they are subject to tax.
Nevertheless, despite th
e common perception, the tax burden on taxable distributions may be less than you think. Some “taxable” distributions might be completely tax-free. The exact tax treatment depends on the “ordering rules” for Roth IRA distributions.
If a withdrawal meets the requirements for a qualified distribution, it is 100% exempt from tax. A qualified distribution is one that is made from a Roth IRA in existence for at least five years after reaching age 59 1/2, upon death or disability or used to pay first-time homebuyer expenses (up to a lifetime limit of $10,000).
All other distributions are nonqualified. Nonqualified distributions are treated as coming from Roth IRA assets in the following order:
- Regular Roth IRA contributions
- Taxable traditional IRA conversions
- Nontaxable traditional IRA conversions
- Earnings on Roth IRA assets
Because distributions are treated as coming first from Roth contributions, you may be able to take out as much as you put in — at any time — without any dire tax consequences.
We can walk you through the “ordering rules” to minimize the tax liability, if any, for your particular situation. There may be additional complications for early withdrawals. We can provide the necessary guidance in this area. Contact us for more details and we will be glad to assist you.
New mortgage interest break
The tax law permits generous deductions for mortgage interest paid in connection with “acquisition debt” and “home equity debt” of a qualified residence. Now a new ruling from the IRS says that you can combine these two breaks on an initial mortgage (IRS Chief Counsel Advice 200940030).
Under the tax law, “acquisition debt” is any debt incurred to acquire, construct or substantially improve a qualified residence. The residence may be the principal residence or one other home like a vacation home. But qualified acquisition debt can’t exceed $1 million ($500,000 for married taxpayers filing separately).
On the other hand, “home equity debt” is debt secured by the residence that is not acquisition debt, up to a limit of $100,000 ($50,000 for married taxpayers filing separately). Home equity debt can’t exceed the difference between the property’s fair market value and the amount of the acquisition debt. Unlike acquisition debt, home equity debt may be used for any purpose.
Generally, home equity debt is incurred after the original mortgage has been arranged. For instance, you may take out a home equity debt a few years after buying a home to pay for college, medical expenses or emergencies.
In the new ruling, a taxpayer purchased a principal residence for $1.5 million, paying $200,000 in cash and borrowing $1.3 million through a loan secured by the residence. After carefully examining the law, the IRS characterized an extra $100,000 above the $1 million threshold as home equity debt rather than acquisition debt. Therefore, the taxpayer can effectively deduct interest paid on up to $1.1 million of the initial mortgage debt.
Although this is an extreme example, there may be other tax-saving opportunities you are not aware of. Call our office to arrange a personal consultation. We may be able to find tax savings that have been overlooked.
Starting a Business
Most businesses start out small. As a new business owner you need to know your federal tax responsibilities. This page provides links to basic federal tax information for people who are starting a business. It also provides information to assist in making basic business decisions. The list should not be construed as all-inclusive. Other steps may be appropriate for your specific type of business.
What New Business Owners Need to Know About Federal Taxes
Can you reconvert an IRA?
Suppose you converted your IRA to a Roth IRA just before the bottom fell out of the stock market last year. Because the tax liability for the conversion is based on the value of the account on the last day of the prior year – Dec. 31, 2007 — you would have paid tax on an inflated value. So you may have opted to recharacterize your Roth into a traditional IRA.
But now you see signs of a market rebound. And you’d like to take advantage of the Roth IRA setup for all the same reasons that attracted you to it in the first place.
In this case, you might “reconvert” your IRA. In other words, you can convert your recharacterized traditional IRA back into a Roth IRA. This is essentially treated as a new conversion for tax purposes.
With a Roth IRA in existence at least five years, qualified distributions are completely exempt from federal income tax. A qualified distribution is one that is paid after reaching age 59 1/2, received on account of death or disability or used for first-time homebuyer expenses (up to a lifetime limit of $10,000). In contrast, traditional IRA distributions are taxed at ordinary income rates as high as 35% — probably even higher in future years.
However, the IRS doesn’t allow you to keep flip-flopping back and forth between the two types of IRAs. You must meet specific time restrictions for a reconversion. Specifically, a traditional IRA can’t be reconverted to a Roth before the later of:
1. The beginning of the tax year following the tax year of the conversion
2. The end of the 30-day period beginning on the day of the recharacterization.
This rule applies regardless of whether the recharacterization falls into the year of the conversion or the following year.
This is an important decision for taxpayers rapidly approaching retirement. We can help you analyze your personal needs. Call us to arrange a consultation.
