Upcoming Changes for Individuals due to Healthcare Reform
On March 23rd, President Obama signed into law the Patient Protection and Affordable Care Act. Though this Act has been signed into law, a second piece of legislation, the Reconciliation Agreement, continues to be debated at this time. If signed, the Agreement could alter some aspects of the Act as detailed below.
In summary, the Act requires that most individuals obtain health insurance, provides a refundable healthcare premium tax credit (to help affordability), and increases the adoption credit, but adds limits on health-related accounts and reimbursements and increases the threshold for claiming medical expenses as an itemized deduction. A large portion of revenue raised to offset the cost of the Act will come from an additional Medicare tax on higher-income individuals.
Medicare Tax Changes
Effective for wages paid after December 31, 2012, the Act imposes an additional 0.9% Medicare payroll tax on earnings and wages exceeding $200,000 ($250,000 for individuals filing jointly), thus raising the rate from 1.45% to 2.35%.
In addition, the Reconciliation Agreement proposes an additional Medicare tax on unearned income for tax years beginning after December 31, 2012. If the Agreement is passed, an additional 3.8% surtax will be imposed on interest, dividends, capital gains, annuities, royalties, and rents from passive activities that exceed the earning thresholds mentioned above.
Health Insurance Requirement
Under the Act, beginning in 2014, most individuals will be required to obtain minimum essential health insurance coverage or pay an annual penalty. “Minimum essential coverage” includes coverage under an employer plan, governmental plan, or any plan offered on the individual market. To encourage individuals to obtain coverage, the Act includes a number of provisions intended to increase the availability and affordability of coverage.
The penalty will be phased in starting in 2014 and will reach the greater of $750 or 2% of income by the year 2016, with a cap of $2,250 per family. Exceptions to the penalty include individuals in transition between plans and low-income individuals. If passed, the Reconciliation Agreement would slightly decrease this penalty structure.
Refundable Healthcare Premium Tax Credit
For tax years after 2013, the Act provides a refundable tax credit to individuals who purchase healthcare coverage on the individual market or through the newly-established health insurance exchanges. This credit is available to those with income ranging from 100 – 400% of the poverty line ($43,420 for an individual or $88,200 for a family of four). Some advance payments of this credit will be provided to help individuals pay for coverage.
Health-Related Accounts and Reimbursements
For tax years after 2010, the Act limits medical reimbursements from FSAs, HSAs, HRAs and MSAs to prescribed medicines, drugs and insulin, thereby eliminating over-the-counter medication (unless prescribed by a doctor). The Act also increases penalties on non-qualified distributions from HSAs and Archer MSAs (from 10-15%) to 20% for tax years after 2010.
The itemized deduction threshold for deducting un-reimbursed medical expenses will increase from 7.5% to 10% of the taxpayer’s adjusted gross income for tax years beginning after December 31, 2012. For taxpayers over the age of 65, the threshold remains at 7.5%.
The Act also limits the amount of salary reductions that can be deducted under a flexible savings account to $2,500 beginning in years after 2010. The Reconciliation Agreement would postpone the flexible savings limit to years beginning after December 31, 2012.
Adoption Credit
The Act increases the child adoption tax credit and adoption assistance exclusion from $12,070 to $13,170, extends the credit through 2011, and makes the credit refundable.
Please note that the Reconciliation Agreement items described above have not been signed into law by the President at this time and are subject to change.
