Six months ago President Obama signed the Patient Protection and Affordable Care Act into law. Even though the new laws center mainly around health care, many provisions of the act will actually be carried out by the Internal Revenue Service. To begin, the new law requires all Americans to have minimum basic health insurance by the year 2014. If you think this will have not impact on you at tax time, read on....
The IRS will be responsible for ensuring that those individuals and businesses who comply receive tax credits to help cover the cost of their coverage. Additionally, the IRS will be quick to impose tax penalties on those who don’t comply.
In order to finance these credits, certain higher-income individuals will pay the price at tax time. The provisions of the law not only increase taxes in some areas but they will also reduce certain tax breaks. For example, right now taxpayers are able to deduct medical expenses once they exceed 7.5 percent of their income. Beginning in 2013, taxpayers under the age of 65 won’t be able to take the deduction until expenses exceed 10 percent of their income. Additionally, those taxpayers who make contributions to a flexible spending account will only be able to contribute $2,500 annually compared to the max contribution of $5,000 in place today. This reduction may prove to be inconsequential for some given that the bill also places restrictions on what can be purchased with these pre-tax dollars. As of 2013, any over-the-counter medications not prescribed by a physician cannot be purchased using flex-plan contributions.
In addition to the reduction on tax breaks, we’ll also see Medicare payroll taxes rise for some. Individuals with incomes of $200,000 or more ($250K for married filing joint taxpayers) will see a .9 percent tax increase to the current rate of 1.45 percent (2.9 percent for the self-employed). For a single person earning $300,000 this means an extra $900 per year in medicare payroll taxes. The bill will also apply Medicare taxes to certain investment income. Beginning in 2013, taxpayers in these same income categories will also incur a 3.8 percent tax on unearned income such as interest, dividends, rents, royalties and capital gains.
While some of these changes seem far off, it’s important to start thinking now about how they may affect you. Contact your local Liberty income tax preparation office to speak with a Tax Advisor about your individual situation.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.