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| This quarterly newsletter
provides general business, financial, and tax
information to our clients. This information
should not be acted upon without further details
and/or professional assistance.
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New health care reform includes current and future tax changes
The new health care legislation includes sweeping changes for both individuals and businesses. The two laws, the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010, encourage universal health insurance coverage through options such as employer plans, state-operated exchanges, and private plans. Here are highlights of tax-related provisions included in these laws.
 Insurance coverage
Small businesses. Starting this year, a small business with fewer than 25 employees and average annual wages of less than $50,000 may use a tax credit to partially offset the cost of employer-provided health insurance. The full credit is available to a business with ten or fewer employees and average annual wages of no more than $25,000 per employee.
Individual coverage. Starting in 2014, an individual who doesn't obtain at least "minimum essential coverage" may be assessed a nondeductible tax penalty. The monthly penalty is calculated using a percentage of the taxpayer's income or a flat dollar amount.
Employer coverage. Beginning in 2014, an employer with at least 50 full-time employees may be assessed a nondeductible tax penalty if it doesn't offer minimum essential coverage.
 Tax on high-incomers
Medicare tax. Currently, the 1.45% Medicare tax applies to earned income like wages. Starting in 2013, two additional Medicare taxes may be imposed on high-income taxpayers:
- A 0.9% Medicare surtax for joint filers on earned income above $250,000 ($200,000 for single filers).
- A 3.8% Medicare tax on "net investment income" for joint filers with a modified adjusted gross income above $250,000 ($200,000 for single filers).
Net investment income includes "unearned income" such as interest, dividends, royalties, rents, gains from dispositions of property not used in an active trade or business, and passive activity income (but not distributions from qualified retirement plans and IRAs).
Other tax changes
Adoption credit. The adoption credit is increased to $13,170 for 2010 (from $12,170) and extended through 2011. The credit is also made refundable.
Information reporting. Effective for 2011, employers must report the value of health insurance coverage on each employee's Form W-2. Effective for 2012, a business must file information returns for annual payments totaling $600 or more made to corporations (other than tax-exempt entities).
Medical deductions. Currently, you can deduct unreimbursed medical expenses in excess of 7.5% of adjusted gross income. Starting in 2013, the floor will be raised to 10%. Exception: Prior to 2017, individuals who are 65 or older are exempt from this increase. They may continue to use the 7.5% threshold.
Flexible spending accounts (FSAs). Beginning in 2013, the maximum amount that may be contributed to a health care FSA will be limited to $2,500 (adjusted for inflation thereafter).
Penalty tax. Starting next year, the additional tax on nonqualified distributions from health savings accounts increases from 10% to 20%. For nonqualified distributions from an Archer medical savings account, the additional tax increases from 15% to 20%.
The health care reform legislation will affect every taxpayer and every business. Contact us for more information on how the new rules will affect you.
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