What the Health Care Act Could Mean to Taxes

As many business owners and individuals know, the 2010 Affordable Care Act includes some major tax changes that will take effect next year. As the law remains in limbo due to its debate in the Supreme Court, we are advising our clients to prepare for the changes until more is known. Please review the changes as outlined below, and we will keep you up-to-date as the Supreme Court makes their decision.

	Currently	Starting in 2013
Medicare Tax	Medicare tax on salary and/or self-employment (SE) income is 2.9%. If you're an employee, 1.45% is withheld from your paychecks, and the other 1.45% is paid by your employer. If you're self-employed, you pay the whole 2.9% yourself.	An extra 0.9% Medicare tax will be charged on: (1) salary and/or SE income above $200,000 for an unmarried individual, (2) combined salary and/or SE income above $250,000 for a married joint-filing couple, and (3) salary and/or SE income above $125,000 for those who use married filing separate status. For self-employed individuals, the additional 0.9% Medicare tax hit will come in the form of a higher SE bill.
Medicare Tax on Investment Income	The maximum federal income tax rate on long-term capital gains and dividends is 15%.	1.     The maximum rate on long-term gains is scheduled to go up to 20% and the maximum rate on dividends is scheduled to increase to 39.6% as the current tax cuts expire. 2.     All or part of the net investment income, including long-term capital gains and dividends, can get an additional 3.8% "Medicare contribution tax." Therefore, the maximum federal rate on long-term gains for 2013 and beyond will actually be 23.8%, and the maximum rate on dividends will be a 43.4%. An example: A married joint-filing couple with AGI of $265,000 and $60,000 of net investment income would pay the 3.8% tax on $15,000 (the amount of excess AGI). If the same couple has AGI of $350,000, they would pay the 3.8% tax on $60,000 (the entire amount of their net investment income).
$2,500 Cap on Health- Care FSA Contributions	There's no tax-law limit on contributions to your employer's healthcare flexible spending account (FSA) plan (although many plans impose their own limits). Amounts you contribute to the FSA plan are subtracted from your taxable salary. Then, you can use the funds to reimburse yourself tax-free to cover qualified medical expenses.	The maximum annual FSA contribution for each employee will be capped at only $2,500.
Higher Threshold for Itemized Medical Expense Deductions	You can claim an itemized deduction for medical expenses paid for you, your spouse, and your dependents, to the extent the expenses exceed 7.5% of AGI.	The hurdle is raised to 10% of AGI.  However, if either you or your spouse is age 65 or older at year end, the 10%-of-AGI threshold will not take effect until 2017.