Health-care act to have tax impact | Health and Fitness

Now that the Supreme Court has upheld the Affordable Care Act, it?s time to start picking through the details. Several key tax rules are scheduled to change in 2013, especially for higher-income individuals.

Republicans are still trying to overturn the law, and that could happen based on what transpires in the November election. But if nothing changes, here?s what to expect in terms of the health-related tax impact, with focus on items that apply to individuals rather than businesses:

New Medicare tax. Higher payroll withholding is on the horizon with the introduction of a 0.9 percent tax starting in 2013. It will hit people with earned income exceeding $200,000 for singles and $250,000 for married couples filing jointly. That?s in addition to the current Medicaid tax of 1.45 percent.

New investment-income tax. The legislation also imposes a 3.8 percent levy on interest, dividends, some rents and other unearned income for people above those $200,000/$250,000 income levels. This levy, also designed to support Medicare, starts in 2013.

?This 3.8 percent tax would be on top of any increase in the dividends/capital-gains/ordinary-income rates that (take effect) ? upon expiration of the Bush-era tax cuts at the end of 2012,? according to tax-researcher CCH.

Top rates rising. That 3.8 percent Medicare addition plus scheduled regular-tax increases mean the top effective rate for high-income earners could go from the current 35 percent to 43.4 percent in 2013, said Jason Miller, manager of financial planning at Harris Private Bank in Scottsdale. The capital-gains rate could go from a top 15 percent this year to 23.8 percent next year.

Harvesting or prematurely locking in capital gains, normally an unwise strategy, could make sense, Miller added. So could accelerating income into 2012 rather than deferring it, if possible. In one strategy cited by Mark Luscombe, principal analyst at CCH in suburban Chicago, you might opt to convert a regular IRA into a Roth, paying the applicable taxes at this year?s lower rates and thereby securing tax-free withdrawals in future years.

Incidentally, selling a home for a large capital gain after this year could be costly, since the gain could increase net investment income and boost adjusted gross income above the $200,000/$250,000 threshold amounts. However, most people won?t face the tax on a home sale, as individuals still will be able to shelter up to $250,000 and couples $500,000 in gains on the sale of a primary residence, said Luscombe.

In other words, the new 3.8 percent tax applies to housing capital gains above the $250,000/$500,000 limits only if your income exceeds the thresholds.

Sticks and carrots. The legislation requires most Americans to carry health insurance. People who refuse to obtain coverage will face a tax penalty, figured as the higher of a flat-dollar amount or a calculation based on a percentage of household income. The flat-dollar amount starts at $95 in 2014 and rises to $695 by 2016, with inflation adjustments after that, reports CCH.

?To determine the penalty, you make two calculations and pay it on the greater amount,? said Luscombe. ?But it?s not something to worry about now,? since the penalty starts in 2014.

Conversely, lower-income people who purchase health insurance might be able to qualify for federal help in the form of a premium-assistance tax credit, also starting in 2014. The formula is rather complex, especially since eligibility hinges in part on whether a person has access to affordable coverage through work. But in general, the tax credit is designed to help those with income modestly above the federal poverty level. It?s expected to average more than $5,000 annually per enrollee and will be refundable.

Then again, some people will be exempt from this requirement and thus the penalty. CCH says the list includes those unable to afford coverage (as determined by a formula), those currently covered by Medicaid and Medicare, members of Native American tribes, certain people objecting for religious regions, prisoners and people living outside the country lawfully.

Tougher deduction threshold. Though not directly related to the individual health-insurance mandate, taxpayers who itemize will find it harder to write off unreimbursed medical expenses starting next year. That?s because such expenses will be deductible only to the extent they exceed 10 percent of a person?s adjusted gross income. That?s up from a current threshold of 7.5 percent.

However, the 7.5 percent floor will continue to apply for people age 65 and older. . Arizona currently allows residents to deduct medical expenses in full, and it?s not clear if that might change.

Because medical deductions will be harder to qualify for next year, it might pay to incur certain expenses this year, if you?re close to or above the 7.5 percent mark but unlikely to hit 10 percent. This goes against the conventional tax-planning wisdom, which says deductions are best delayed until 2013 since they will help shelter income taxed at higher rates then.

IRS guidance. Almost every federal tax bill leaves a few question marks, and this one is no exception. So look for the Internal Revenue Service to issue regulations in coming months. As if it wasn?t busy enough, the IRS now will oversee and enforce the new health legislation.

?Concerns remain over how the IRS will interpret parts of the law as it continues issuing guidance to implement it,? said CCH. ?Many observers contend that the IRS is significantly underfunded at current levels to handle its expected multifacted role in implementing the health-care law,? said CCH.

Even if the IRS can seamlessly handle its new oversight duties, one thing is certain: Taxpayers will have a tougher time figuring everything out.

Reach Wiles at 602-444-8616.

Article source: http://www.azcentral.com/business/articles/2012/07/23/20120723health-care-act-tax-wiles.html

Source: http://medicaltips.org/2012/07/29/health-care-act-to-have-tax-impact/

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