I havent yet read the 2,400-plus pages of the Health Care Reform Bill (the Patient Protection and Affordable Care Act) that President Obama signed into law on Tuesday. Not even the hundred-plus pages of tax provisions in the bill. But from talking to those who have, it looks like there is enough in it to keep tax professionals occupied for awhile.
As expected, individual taxes will be affected once the health care bill becomes law, said Amy McAnarney, CPA, executive director of The Tax Institute at H&R Block. From taxpayers who choose not to purchase health care coverage to those that adopt children, have flexible spending accounts, and even the higher-income taxpayers, everyone needs to pay attention to important changes in the health care bill that could affect their tax situation.
Brenda Schafer, CPA, EA, manager of tax analysis at The Tax Institute, noted that anytime theres a change in tax law it causes confusion. But most of the provisions have delayed effective dates, she observed. Just a few are effective now, such as the adoption credit, and the small business credit. Everything else doesnt start to take effect until at least next year, and the provisions that would require most individuals to carry coverage will not take effect until 2014. There will be time to understand how it affects us, both as individuals and businesses.
For taxpayers who adopt children, the bill makes the adoption credit refundable, increases the credit by $1,000, and extends the increased adoption credit through 2011. The credit for small-business employee health coverage is designed to offset the cost of employee health insurance for small businesses, and is available for businesses that provide qualifying coverage to no more than 25 full-time equivalent employees and pay average annual wages of less than $50,000.
The new legislation will bring about a change in attitude and will require some planning, according to Schafer.
Currently, businesses provide health coverage because they know their employees need and want it, she said. Its a perk that helps them retain their employees. If a business doesnt provide health coverage, its often because it cant afford to. Now it has to provide it or pay a penalty.
The provision most immediately affecting individuals is the change in the definition of reimbursable expenses for flexible spending accounts and health savings accounts, and the increased penalty for nonqualified disbursements from HSAs, said Schafer.
Beginning in 2011, only prescribed drugs and insulin will be reimbursable through flexible spending accounts or health savings accounts. As a result, over-the-counter drugs such as aspirin or medical-related items such as bandages will no longer be qualified expenses for HSA or FSA purposes. In addition, the penalty for nonqualified distributions from health savings accounts increases from 10 to 20 percent in 2011.
If you use the funds for the wrong thing, for FSAs you just pay tax on the income theres no penalty, she said. But if you use funds out of an HSA, you pay the penalty. Its important for people to understand this and know how it affects them.
Schafer expects that Block professionals will get questions about the legislation during the remainder of tax season.
Its in the news, and everyone has an opinion on it, she said. We want to get the information out to our tax professionals and the taxpayers so they will know what effect the legislation will have on their return.
Additional provisions affecting individuals are the following, according to Schafer:
Beginning in 2014, taxpayers who are required to obtain or maintain qualifying health care coverage will face a penalty if they do not comply. This penalty increases from $95 in 2014 to $695 in 2016. They must file a return substantiating required health care coverage beginning in 2014. Subsidies, administered through an insurance company, will help defray the cost of the insurance for individuals below a certain income level.
For 2013-2016, the threshold for deducting medical expenses increases from 7.5 percent of adjusted gross income to 10 percent. The threshold is not changed for individuals who are at least age 65 by the end of the year.
Beginning in 2013, the 1.45 percent employee portion of Medicare tax will increase by 0.9 percent for taxpayers with earned income in excess of $200,000, or $250,000 for joint filers. Any tax not fully withheld and then subsequently remitted by the employer must be paid by the employee through their tax return. This also applies to self-employment income.
Also in 2013, taxpayers with adjusted income more than $200,000 ($250,000 for joint filers) will be subject to an additional 3.8 percent tax on net investment income (such as interest, dividends, capital gains).
Meanwhile, court challenges, future elections and legislation may play a huge role in the ultimate implementation of the law.
At least 13 states have already filed suit to contest the constitutionality of requiring individuals to carry coverage, Schafer noted. The thinking is that the federal government is overstepping its bounds, and that its an issue that is up to the states to determine," she said. "By 2014, portions of the bill could be repealed before it takes effect.
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