As you can see we, as tax experts, are going to find ourselves up to our hips in health insurance issues. As well all now know, mandatory health care is really just another pile of taxes. So, what are the issues for individuals?
We will break down how this applies to you in this Press Release. For more history, read the full story now on our site: http://www.truax.net/?
Starting in 2014, if you don't already have qualifying health coverage, you have to buy health insurance or pay a tax. Some people are exempt, such as those covered by Medicare or Medicaid, incarcerated people, illegal aliens, members of Indian tribes, and those who are members of a religion conscientiously opposed to accepting benefits. There's a 90-day grace period each year, meaning you can go without insurance for no more than 90 days before the penalty tax kicks in.
Also, people who can't afford coverage are exempt. “Unable to afford” in this case means people where the cheapest possible qualifying policy available through a state exchange would cost more than 8% of their household income. People whose household incomes are below the tax filing thresholds are also exempt.
The Penalty Tax
The penalty tax will be imposed on each month you don't have qualifying insurance (1/12 of the penalty to be imposed for each month you are insurance-less)
In regard to the details of just exactly how this will be computed; who is considered a member of the household; what income is considered; etc., etc., I dunno. IRS will be issuing regulations to explain how they plan to enforce all this someday.
Premium Assistance Tax Credit
Starting in 2014, certain low-income individuals who get qualifying insurance through a state exchange (assuming they aren't adequately covered elsewhere) may qualify for a premium assistance tax credit. If your household income (there's that term again) is between 100% and 400% of the Federal poverty level for your family size, you may qualify.
If your employer offers affordable coverage (meaning that your contribution is not more than 9.5% of your household income), that insurance counts for these purposes whether you get it or not, and you would not qualify for the credit.
Higher Medical Deduction Threshold
For years medical expenses have been deductible to the extent they exceeded 7.5% of your adjusted gross income. It's going to be 10% of adjusted gross income starting in 2013. However, if you're 65 or older before the end of 2013, you still get the old 7.5% limit through the end of 2016. In case you were one of the few people whose medical expenses were already over 7.5% of their income, this will make your medical expenses less deductible, if deductible at all.
Higher Taxes on HSA and MSA Distributions
Just in case you have distributions from a health savings account (HSA) or medical savings account (MSA) which exceed your actual medical expenses for the year, the overage will immediately be subject to an additional penalty tax of 20% of the overage, in addition to being included in your taxable income. So, don't take the money out of those HSAs and MSAs unless you know you've spent at least that much on allowable medical expenses.
Additional Medicare Tax
Starting in 2013, there will be an additional 0.9% Medicare tax imposed in the wages and self-employment income of individuals with earned income over $200,000 and married couples with earned income over $250,000. This will be in additional to all other and regular income taxes.
If your wages go over $200,000 your employer should withhold this additional tax. If your income, when combined with that of your spouse goes over the limit, but is not over $200,000 by itself, you will need to be aware of this additional tax because your employer won't withhold for it. If you're self-employed or earn income as an owner from a company taxed as a partnership, you're just going to have to plan for this new additional tax.
The IRS has not released regulations on this either, so I have no idea of exactly how it will work, and what exactly will be covered.
Medicare Tax on Investment Income
Starting in 2013, there will be a 3.8% Medicare tax on unearned income. This will be in additional to all other and regular income taxes. The tax will be imposed on your net investment income for the year (meaning gross investment income less related expenses), or your modified adjusted gross income in excess of $200,000 ($250,000 for married couples).
Investment income is defined by law as including:
● Gross income from interest, dividends, annuities, royalties and rents, unless you get these type of income in the ordinary course of your business;
● Other gross income from any passive trade or business; and
● Net gain attributable to the sale of property, other than property held in the normal course of a business which is not a passive business.
What does this include? Well certainly interest, dividends, capital gains, rental income, annuities, royalties, and partnerships (if you're a passive investor). It also includes things like the taxable portion of the sale of your house, should you have a taxable gain on selling your house. Remember, in regard to the sale of a personal residence, the first $250,000 of profit is not taxable if you're single; it's the first $500,000 for couples.
The IRS has also not released regulations on this, so I have no idea about how it will specifically be implemented. We have to wait and see.
Of course, if you have substantial taxable capital gains pending, you might want to take a look at getting them realized before the end of 2012. Don't forget that the Bush-era tax cuts, which brought down overall tax rates as well as the tax rates on capital gains and dividends, are scheduled to expire on December 31, 2012. This means that the effective tax on capital gains, interest and dividends for Californians (as well as those in other high-tax states) could go over 50%.
It's possible that inter-company loans could also be subject to this new tax, so if you have a situation where Company A has borrowed from Company B, or maybe where Mr. Shareholder has borrowed from Company A, you might want to look at getting those loans reduced or off the books.
Retirement plan contributions might also start looking more valuable, if the alternative is paying higher taxes. Some investors might also want to look at revising annuity plans they have in place, or thinking about tax-exempt bonds.
Depending on how the regulations play out, Subchapter S corporations might also be a good planning tool, because the way it looks now, profits from these corporations which go to owners who actively work in the business might not be subject to either the new Medicare tax on wages or the Medicare tax on investment income.
Please be aware that the purpose of this message is not to provide exact data or advice about what's going to happen or what you should do. I've left out tons of details which would have bogged it down in order to get you a workable overview.
Unfortunately, we can't really go much further than this right now, because without regulations which provide the down-and-dirty details of how this is all going to be enforced, we can't really say what will fly and what will flop. However, you can bet we'll be keeping an eye on this, and will let you know as soon as the landscape firms up.
William D. Truax, E.A., Inc.