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We are writing to give you
a brief overview of some key tax changes affecting individuals in the
recently enacted health reform legislation.
· A $250 rebate to
Medicare beneficiaries who have paid between $2,830 and $4,550
out-of-pocket for prescription drugs under the standard part D drug
prescription plan.
· The general
exclusion of reimbursements for medical care expenses under an employer-provided
accident or health plan is extended to any child of an employee who has
not attained age 27 as of the end of the tax year.
· The new law provides
small employers (less than 25 full-time employees with average wages of
$50,000 or less) with a tax credit (i.e., a dollar-for-dollar reduction
in tax) for nonelective contributions to purchase health insurance for
their employees. The credit can
offset an employer's regular tax or its alternative minimum tax (AMT)
liability. A 35% credit is available
for tax years 2010 through 2013, 50% in 2014.
Changes beginning in 2011
· The costs for
over-the-counter drugs not prescribed by a doctor will be excluded from
being reimbursed through a health reimbursement account (HRA) or health
flexible savings accounts (FSAs) and from being reimbursed on a
tax-free basis through a health savings account (HSA) or Archer Medical
Savings Account (MSA).
· The tax penalty on
distributions from a health savings account or an Archer MSA that are
not used for qualified medical expenses will increase to 20%.
Changes beginning in 2013
· Health flexible spending arrangements (FSAs) will
be capped at $2,500, inflation indexed after 2013.
· The AGI floor medical expenses deduction will be
raised from 7.5% of adjusted gross income (AGI) to 10%. For individuals age 65 and older (and
their spouses) will remain unchanged at 7.5% through 2016.
· Single people earning more than $200,000 and
married couples earning more than $250,000 will be taxed at an
additional 0.9% of Medicare hospital insurance tax on the excess over
those base amounts.
· Medicare tax, for the first time, will be applied
to investment income. A new 3.8%
tax will be imposed on net investment income of single taxpayers with
AGI above $200,000 and joint filers over $250,000 (unindexed). However, the new tax won't apply to
income in tax-deferred retirement accounts such as 401(k) plans.
Changes beginning in 2014
· The "individual mandate" will require
U.S. citizens and legal residents to have qualifying health coverage or
be subject to a tax penalty.
Under the new law, those without qualifying health coverage will
pay a tax penalty of the greater of: (a) $695 per uninsured adult ($347
under 18), up to a maximum of
$2,085 per family, or (b) 2.5% of household income over the
threshold amount of income required for income tax return filing. The
per adult penalty will be phased in according to the following
schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat
fee or 1.0% of household income in 2014, 2.0% of household income in
2015, and 2.5% of household income in 2016. Beginning after 2016, the flat fee
penalty will be increased annually by a cost-of-living adjustment. Some exemptions will be granted.
· A refundable tax credit (the "premium
assistance credit") payable in advance directly to the insurer of
certain health insurance plans, will be available for individuals and
families with incomes up to 400% of the federal poverty level ($43,320
for an individual or $88,200 for a family of four, using 2009 poverty
level figures) that are not eligible for Medicaid, employer sponsored
insurance, or other acceptable coverage, who purchase health insurance
through an Exchange. This credit
will be based on a sliding scale percentage of insurance premiums.
· Employer mandate. Employers
with fewer than 50 employees aren't subject to the "pay or
play" penalty. Only an
"applicable large employer," defined as someone who employed
an average of at least 50 full-time employees during the preceding
calendar year, is subject to the requirement to offer minimum essential
coverage for all its full-time employees.
· The "pay or play" penalty is an excise
tax assessed on a monthly basis.
The first 30 full-time employees are subtracted from the
calculation. The penalty
calculation has two categories.
1. Employers not offering its full-time
employees and their dependents the opportunity to enroll in affordable
minimum essential coverage under an employer-sponsored plan if any
full-time employee is enrolled in an insurance exchange and receives a
premium assistance tax credit or cost-sharing.
2. Employers that offer for any
month, its full-time employees and their dependents the opportunity to
enroll in affordable minimum essential coverage under an
employer-sponsored plan and any full-time employee is enrolled in an
insurance exchange and receives a premium assistance tax credit or cost-sharing.
In the case of (1) above,
the penalty is equal to the product of 1/12 of $2,000 for any month
($166.67) and the number of full-time employees for the month above the
30 full-time employee threshold.
In the case of (2) above, the penalty
is equal to the product of the number of full-time employees receiving
a premium assistance tax credit or cost-sharing and an amount equal to
1/12 of $3,000 for any month ($250). However, the aggregate amount
of the penalty on an employer for any month is limited to the product
of the applicable payment amount (1/12 of $2,000 per month) and the
number of full-time employees during that month.
We hope this information
is helpful. If you would like more details about these provisions or
any other aspect of the new law, please do not hesitate to contact our
office at (315) 234-1100.
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Bowers & Company, CPAs, PLLC
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