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MEDICAL DEDUCTION THRESHOLD
The threshold to claim an itemized deduction for unreimbursed medical expenses rises from 7.5 percent of adjusted gross income to 10 percent of AGI for tax years beginning after Dec. 31, 2012. Individuals (or their spouses) age 65 and older before the close of the tax year are exempt from the increased threshold until 2016.
Accelerating medical expenses so that they are paid and incurred in 2012 will make sense for individuals at or above the 7.5 percent threshold. Techniques to realize a greater amount of net investment income before 2013, however, may be counterproductive in that raising capital gains would raise AGI and, therefore, effectively raise the threshold dollar amount for the medical expense deduction.
The Alternative Minimum Tax treatment of the itemized deduction for medical expenses, however, is not changed. Thus, medical expenses are deductible only to the extent that they exceed 10 percent of AGI, even if the taxpayer (or their spouse) is age 65 or older before the close of the tax year.
SMALL EMPLOYER HEALTH INSURANCE CREDIT
An eligible small employer may claim a 35 percent tax credit (25 percent in the case of a tax-exempt eligible small employer) for premiums it pays toward health coverage for its employees in tax years beginning in 2010 through 2013. An eligible small employer is an employer that has fewer than 25 full-time employees whose average annual compensation employees is less than $50,000. The credit is reduced by 6.667 percent for each full-time employee in excess of 10 employees and by 4 percent for each $1,000 that average annual compensation paid to the employees exceeds $25,000. In tax years that begin after 2013, an employer must participate in an insurance exchange in order to claim the credit, and other modifications and restrictions on the credit apply.
The small-business credit has been underutilized, according to the Government Accountability Office. It has reported that only 170,300 small employers claimed the credit in tax year 2010 out of approximately 1.4 million to 4 million eligible businesses. Amended returns may be filed to claim the credit, so that this small-employer health insurance credit may be worth another look now that the Supreme Court in effect has said that it is here to stay.
The health care law generally had required employers to report the cost of employer-provided health coverage on Forms W-2 starting with W-2s issued in 2012 for the 2011 tax year. In Notice 2010-69, the IRS made reporting of employer-provided health coverage on W-2s optional for all employers for 2011. In Notice 2012-9, the IRS provided transitional relief under which qualified small employers (with fewer than 250 W-2s) will not be required to report health coverage on 2012 W-2s for small employers (W-2s provided to employees in 2013). Other employers, however, must prepare for reporting on W-2s sent in January 2013.
Effective for tax years beginning after Dec. 31, 2012, contributions to health flexible spending arrangements are limited to $2,500. Currently, there is only a statutory dollar limit of $5,000 on dependent care FSAs; no statutory limit exists currently on health care FSAs, although many employers impose the same limits on both types of FSAs. The $2,500 limitation is adjusted annually for inflation for tax years beginning after Dec. 31, 2013.
With open enrollment materials already being printed for the upcoming year, many employers who did not count on the law continuing will need to scramble to ready the appropriate information in time. However, as explained in Notice 2012-40, the $2,500 limit on health FSA salary reduction contributions applies on a plan year basis and is effective for plan years beginning after Dec. 31, 2012. Employers with non-calendar-year plans will not be required to comply until plan year renewal in 2013.
No matter what direction health care reform now takes following the Supreme Court's decision, the likelihood is that compliance with the rules -- no less strategies to minimize their tax costs -- will be challenging. The next five months will be especially critical not only to how the rules are modified, but also which requirements will be in full force starting Jan. 1, 2013. For many taxpayers, preparations for those provisions cannot begin soon enough.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.