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Tax Implications of the 2010 Healthcare Act
The Supreme Court recently ruled the 2010 Healthcare Act to be constitutional. What does this mean in regards to your taxes? They are going up! And they are going up as soon as 2013, barring a Republican victory in the November election that repeals the Healthcare Act. To mitigate the anticipated increase in taxes will take some non-traditional tax planning consisting of accelerating income and deferring deductions. Listed below are the upcoming changes and possible recommendations.
Tax increase # 1: New $ 2,500 limit on healthcare FSA contributions.
Pre-tax employee contributions to flexible spending accounts (FSA’s) will no longer be unlimited, but limited to a maximum contribution of $ 2,500. Less pre-tax contributions means higher taxes. Make sure you use up all of your 2012 contribution in case your employer is kind enough to refund the unused portion in 2013 where it would be taxed at higher rates.
Tax increase # 2: Higher threshold for Itemized Medical Expense Deduction.
Before you can deduct any medical expenses, they must exceed a threshold. The threshold will increase from 7.5% of your adjusted gross income (AGI) to 10% of your AGI. Less medical deductions exceeding the threshold means higher taxes. Consider bunching medical deductions into 2012 to ensure more exceed the threshold and are therefore deductible.
Tax increase # 3: New 0.9% Medicare tax.
An extra .09% Medicare tax will be charged salaries/wages or self-employment (SE) income above $ 200,000 if you are unmarried or $ 125,000 if you are married but filing separate. If you file jointly with your spouse, the tax is charged on combined compensation or SE income over $ 250,000. Consider accelerating this income into 2012 to avoid this new tax if this doesn’t push you into a higher tax 2012 tax bracket.
Tax increase # 4: New 3.8% Medicare tax on Investment Income.
This change is the most complicated of them all. Basically there is an additional 3.8% tax on the lesser of your investment income or the amount your modified adjusted gross income (MAGI) levels exceeds $ 200,000 if unmarried, $ 250,000 if married, and $ 125,000 if married and filing separately. Investment income is defined as a) gains from the sale of investments such as stocks, real estate and sometimes even your personal residence, b) gross income from interest, dividends, annuities, royalties and rents, and c) gross income from passive business activities. MAGI for most people will be defined as the last line on page of 1 of your form 1040. This tax is also applicable to trusts to the extent of the lesser of undistributed net investment income or the amount of AGI in excess of the threshold for the top trust income tax bracket which will probably be $ 12,000. Obviously lots of higher income taxpayers and trusts will be subject to this tax. Consider accelerating into 2012 the selling of investments that you were thinking of selling in the near future anyway to have them taxed at a 15% rate instead of a 20% rate and avoid the additional 3.8% Medicare tax. Also consider investing in tax exempt municipal bonds since the interest they pay would not be subject to this tax.
Implementing the above recommendations may not work for every taxpayer. Please give us a call to see what strategy will best suit your situation in case the Healthcare Act is not repealed.