New Health Legislation and Tax

As you are no doubt aware, Congress has recently passed a comprehensive overhaul of the U.S. health care system. Whether one agrees with the merits of this legislation is irrelevant for purposes of this article, as there are numerous tax ramifications associated with this legislation that will be discussed herein.

Initially, it is important to note that this is one of the more complex pieces of legislation that we have seen and it contains numerous tax provisions, many of which do not take effect for several years. Here is a tax synopsis of the legislation:

2010. Small businesses (25 employees or less and no more than $50,000 in average annual wages) would receive a tax credit up to 35% of the cost of health insurance for employees as long as the business pays at least 50% of the health insurance premium costs. In addition, the adoption credit has been increased by $1,000 and it now becomes refundable.

2011. Individuals who spend money from a health care savings account on ineligible items will face an extra 20% tax on the amounts spent. In addition, only prescription drugs and insulin will now be eligible for reimbursement. This WILL affect medical reimbursement plans, as over-the-counter medicine and medical items such as bandages would no longer be covered (or be reimbursable). All amounts paid for health insurance will be required to be reported on the employee’s W-2 for this year. Finally, a new employee benefit cafeteria plan will be introduced that eases restrictions to allow small businesses to provide tax-free benefits to their employees.

2012. Forms 1099 will be required for ANY payment of $600 or more made to any corporation or other business entity in addition to payments made to individuals.

2013. Individuals can now contribute a maximum of $2,500 per year on flexible health care spending accounts (the limit until 2013 is $5,000 per year). In addition, the threshold for deducting medical expenses on Schedule A goes from 7.5% of income to 10% of income (for those taxpayers who are under 65 years old- if you are 65 or older, the threshold will remain at 7.5%). Finally, individuals who earn over $200,000 (or married couples who earn over $250,000- another example of the Congressional “marriage penalty”) will see their Medicare taxes (a part of Employment and/or Self-Employment taxes) will increase from 1.45% to 2.35%. In addition, an extra tax of 3.8% will be imposed on unearned income (i.e. interest, dividends, royalties, rents, passive income, capital gains, etc.). This is called the Unearned Income Medicare Contribution.

2014. January 1, 2014, is the first date that all Americans must have health insurance or face potential fines up to 1% of their taxable household income. There are exemptions in place for those who cannot afford the insurance. Tax credits would also begin for those individuals who earn $43,420 or less (single) or $88,200 for a family of four. This is also the first year that large employers (over 50 employees) must fund health insurance or be faced with excise tax penalties. Small employers (25 or less employees) can also begin to obtain a 50% tax credit for the amounts of the health care insurance contributions the business makes.

2015. Penalties will increase for those who do not have health insurance to a potential 2.5% of household taxable income.

2016. The penalties for the failure to carry health insurance are now indexed for inflation.

2017. This is the first year that an excise tax (40%- and this is a non-deductible tax) applies to health insurance policies that cost more than $10,200 for a single employee and $27,500 for family coverage.