The Rich and Sick Taxed to Pay for Health Care Reform
NEW YORK ( MainStreet) Last week, the Treasury Department and Internal Revenue Service (IRS) issued final regulations on the individual shared responsibility provision of the Affordable Care Act (ACA) with few changes to the provisions of the proposed regulations.
"Most people associate the ACA solely with the creation of the healthcare exchanges and the individual and employer insurance mandates," says Lindsey Buchholz, a tax lawyer and a lead analyst in The Tax Institute at H&R Block. "However, the ACA also alters "how much taxpayers owe, how much they can put in a flexible spending account and how much they can deduct in medical expenses not just their insurance."
The health care law includes several changes to income taxes, most of which affect individuals with incomes over $200,000, $250,000 for couples, but some of which affects taxpayers who have high medical expenses.
The government has placed a $2,500 limit to salary reduction contributions per employee per year under health Flexible Spending Accounts (FSAs).
Married couples can each allocate up to $2,500 to an FSA, notes James H. Guarino, a CPA at MFA-Moody, Famiglietti & Andronico.
Starting in 2014, the limit will be adjusted for inflation.
The change will negatively impact parents who have special needs children and who use FSA funds to help pay for tuition in special needs schools, says Xavier Epps, owner of XNE Financial Advising.
"The lose-it-or-use it feature of FSAs still applies for 2013 and later," says Michael D'Addio, principal at Marcum, an accounting firm. "In the old days [prior to 2011], you could always go to a drug store and stock up on over-the-counter items to use up any balance so that the funds would not be lost. Under the current rules, this strategy does not work, since these items are not considered qualified medical expenses."
However, if you can get a prescription for these drugs, they can qualify as medical expenses.
"Many physicians will balk about providing prescriptions for such items," D'Addio says. "However, if a cardiologist tells a patient to purchase aspirin, the patient should request a prescription."
There's also a hike in Medicare taxes in 2013. Individuals earning more than $200,000 a year and married couples filing jointly earning more than $250,000 a year will see an increase of 0.9% Medicare tax withheld on their earnings that exceed the threshold.
The same workers will also see a new 3.8% tax on investment income. Taxpayers with unearned income and modified adjusted gross income (AGI) above the threshold amount must pay a 3.8% tax on net investment income or the amount of modified adjusted gross income above the threshold amount, whichever is less.
For the more than 10 million individuals and families that claim medical expenses in 2011, there's more bad news. In order to claim medical expense deductions in 2013, the claims must be at least 10% of AGI, up from 7.5% in the past. There's an exception for people who are age 65 and older at the end of the year and for married taxpayers with only one spouse age 65 or over. Their threshold will remain at 7.5% until the 2017 tax year.