Last time, I told you a little about the upcoming changes to our healthcare system as a result of the new healthcare legislation. Now I want to fill you in on some of the tax provisions you can expect as a result of the bill. Let’s start by talking about some provisions that go into effect by the first of next year. The healthcare bill places a ten percent excise tax on indoor tanning services. This goes into effect starting July 1, 2010. Presumably, tanning salon owners will pass this tax onto the consumer. Just one more reason to head to the beach!
Under the new law, over-the-counter drugs do not qualify anymore as tax-free reimbursements from qualified employer or individual health plans. Therefore, reimbursed expenses for non-prescription medicine would trigger a penalty. Effective January 1, 2011, that penalty doubles from ten percent to twenty percent.
Probably the most significant change will be the tax increases coming on Medicare which will start in 2013. Wage earners and self-employed individuals will pay an additional 0.9 percent Medicare surtax on wages or self-employment income that is greater than $250,000 for married filers or $200,000 for single filers. One catch for self-employed individuals is that they have been able in the past to take an ‘above-the-line’ deduction for half of the Medicare tax they paid which is not allowed for the additional 0.9 percent surtax under the current law.
In addition, there is a new 3.8 percent Medicare surtax on investment income. This is also effective beginning in 2013. The same income levels as above apply to this tax also. However, the threshold amount is based on modified adjusted gross income (MAGI) for this surtax. Investment income includes interest, dividends, royalties, rents, trade or business income from a passive activity and gains from a disposition of property. This income can be offset by properly allocated expenses to such income. For example, if a couple had $200,000 in wages, $25,000 in capital gains and $50,000 in rental income, $25,000 would be subject to the new tax. The good news is the tax will not apply to income from tax-deferred retirement accounts, such as distributions from 401(k) plans and IRA’s. But keep in mind the distributions themselves will increase MAGI thus potentially subjecting other investment income to the tax.
It should be noted that tax-exempt bond interest and gain from the sale of a primary residence are two sources of income excluded from this surtax. However, if the gain on a primary residence exceeds the $250,000 for single filers and $500,000 for married filers, then that amount would be subject to the tax. So if you have a residence in this category or a vacation home or investment property that you are thinking of selling in the near future, you have an additional incentive to sell them prior to December 31, 2012. Also, if you will be subject to this tax and are not contributing the maximum amount into your tax-deferred retirement account, you should consider doing so. This ‘above-the-line’ deduction reduces your MAGI and thus lessens your exposure to the new tax.
As you can tell, higher-income taxpayers will be seeing an increased annual tax bill as a result of the Health Care Act of 2010. And this does not take into account the proposed increases to the individual income tax rates as well as other proposals being considered right now. However, with some planning these new taxes can at least be minimized.