8/13/2019 Taxes & Health Care Reform

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By James P. Sacher, CPA, Skoda Minotti

Last month, CPA Voice examinedthe effects of health care reform on

businesses. This month, well takea closer look at the tax effects onindividuals due to passage of the PatientProtection and Affordable Care Act.

Unless otherwise noted, the provisionsdescribed below become active after2013.

Health insurance requiredThe Act makes health insurancemandatory and assigns a penalty toindividuals not in compliance. Thepenalty is the greater of $95 (growingto $695 in 2016) or 2.5% of householdincome over the income threshold for

tax ling.

There are exceptions to therequirements, including: Financial hardship Those without coverage for less than

three months Those for whom the lowest plan option

is greater than 85% of householdincome

Those below the tax ling threshold($9,350 single / $18,700 couples in2010)

To help low and middle incomeindividuals and families meet thisrequirement, tax credits will be availableto individuals and families with incomeup to 400% of the federal poverty level($43,320 for individual and $88,200for family) and who are not otherwiseeligible for Medicaid or employer healthinsurance.

The amount of the credit awardedis based on a sliding scale of anindividuals household income andthe cost of the insurance. To receivethe credit, the individual provides theinformation to their State InsuranceExchange, which in turn certies theperson. The IRS then pays the creditamount directly to the insurance plan

in which the individual is enrolled. Foremployed individuals who purchasethrough an exchange, premiumpayments are made through payrolldeductions

Higher Medicare taxesSingles with an adjusted gross income(AGI) greater than $200,000 and coupleswith an AGI greater than $250,000 willbe the hardest hit by the new bill.

Current law imposes a Medicare tax onearned income at 2.9% (1.45% paid each

by employee and employer) without alimit. Under the new law, higher incometaxpayers will pay an additional 0.9%Medicare tax (2.35% total) on earnedincome in excess of the limits statedabove. Employers will not be affectedby the new tax, but must collect throughwithholdings.

As this tax is collected throughwithholdings, couples earning less than$200,000 individually, but greater than$250,000 collectively need to be aware ofa possible extra burden at tax ling time.For example, if a couple were eachearning $170,000 per year, both wouldonly have the traditional 1.45% withheldfrom their pay checks. At tax ling time,however, because their joint incometotaled $340,000, the couple would beresponsible for paying the additional.9% Medicare tax on the income earnedover $250,000. In this case, that resultsin an additional $810 ($90,000 * .9%) taxliability.

Additionally, under the new law, theMedicare tax is now extended tonet investment income for the highincome taxpayers above the thresholdsdescribed above. The amount is 3.8%(1.45% + 1.45% + .9%). This is all paidby the employee.

The following is considered netinvestment income: Interest

Dividends Royalties Rents Passive activity income and gain from

disposition of property (capital gains)

This income may be reduced by anyproperly allocable deductions. It doesnot include income from tax deferredretirement accounts and it applies onlyto the $200,000/$250,000 thresholdsdescribed above. For example, ifthe couple described above (AGI of$340,000) has $50,000 in capital gainsincome, it would be taxable at the 3.8%rate for an additional tax liability of

$1,900. This is effective after 2012.

Other provisions to considerMedical expense deductionsThe oor on medical expense deductionsis raised from 7.5% of AGI to 10% ofAGI for years after 2012.

Over-the-counter medication Over-the-counter medications fromHSAs, HRAs, FSAs, and MSAs are nolonger eligible for reimbursement foryears after 2010.

Non-qualied distributionsThere is an increase in penalties on non-qualied distributions from HSAs andMSAs to 20% of the disbursed amountfor years after 2010.

Flexible spending accountsThe amount contributed to FSAs willbe limited to $2,500 for years beginningafter 2012.

Employees childrenThe exclusion from income ofreimbursements for medical care underan employer sponsored health plan isextended to children of employees up toage 27. This also includes the exclusionfor employer provided coverage and iseffective March 31.

James P. Sacher, CPA is a partner withSkoda Minotti and leads the rm's health

care practice. He provides tax and business consulting services to a variety of businessesincluding physician practices, hospital based

physician groups and hospitals.

Tax

Individual taxes: Health care reform's impact The Patient Protection and AffordaCare Act contained many changesimpacting individuals, including:

Health insurance is mandatoryfor individuals, though there areexceptions and credits to helppeople.

Singles with an Adjusted GrossIncome (AGI) greater than $200and couples with an AGI greatethan $250,000 will face higherMedicare taxes.

Other changes impact:

Medical expense deductions

Over the counter medicationdeductions

Non-quali ed distributions

Flexible spending accounts

Age of allowable dependents

1099 Requirement: Beginning in all companies will have to issue 109tax forms not just to contract workebut to any individual or corporationfrom which they buy more than $60goods or services in a tax year.

TAKEAWAYS

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LEARN MORE

New 1099 requirementmeans (a lot) more

paperwork on the way

Who would have thought that just a fewlines of a bill that that is over 2,000 pagescould be so important? Well, that indeedis the case with Section 9006 of the newhealth care bill.

Section 9006 now requires that, beginningin 2012, all companies will have to issue1099 tax forms not just to contract workers,but also to any individual or corporationfrom which they buy more than $600 ingoods or services in a tax year.

So in other words, that $800 laptop thatyou bought for your small business atBest Buy?You now have to send Best Buya 1099 for the purchase.

This seemingly small change will resultin literally millions of new required taxdocuments issued by both large andsmall companies each year. So why isthe change being made? Basically, thethinking is that the use of the 1099 formswill generate more government revenueand help offset the cost of the health bill.

Before everyone gets too worked up,keep in mind that the nal impact of thelaw won't be known until the IRS issuesits regulations on the new law. The IRShas not yet commented on when it willrelease regulations or schedule publichearings, but these are not expected toarrive until sometime next year.