Just over three years ago, Congress enacted legislation that overhauls the US health care system and affects nearly all taxpayers, many employers and many elements of the health care industry. Some of the Tax changes taking effect in 2013
Increased hospital insurance tax for high-earning workers and self-employed taxpayers.
Beginning in 2013 employers must begin withholding the additional 0.90% Medicare tax in the pay period in which an employee’s wages are in excess of $200,000 and continue to withhold it until the end of the calendar year. This tax is only imposed on the employee. Under IRS guidance an employer must begin withholding at the $200,000 threshold, even if the employee might not ultimately be liable for the tax. For instance, married couples filing jointly won’t have to pay the additional tax unless their combined income is over $250,000 but if one of the individuals makes over $200,000 the employer must still withhold their tax. In this case any excess Medicare tax withheld will be credited against the total tax liability shown on the employee’s individual income tax return.
Surtax on unearned income of higher-income individuals.
For tax years beginning after December 31, 2012 an unearned income Medicare contributions tax is imposed on individuals, estates, and trusts. For an individual the “net investment income tax” is 3.8% of the lesser of either (1) net investment income or (2) the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return, $125,000 for a married individual filing a separate return and $200,000 for all others). The surtax does not apply to distributions from tax-favored retirement plans and excludes items such as interest on tax-exempt bonds, veterans’ benefits and also excludes gains from the sale of a principal residence.
Higher threshold for deducting medical expenses.
For tax years beginning after December 31, 2012 unreimbursed medical expenses are deductible by taxpayers under the age of 65 only to the extent that they exceed 10% (rather than 7.5%) of adjusted gross income for the tax years. If the taxpayer or his or her spouse has reached age 65 before the close of the tax year, a 7.5% floor applies through 2016 and then a 10% floor applies for all tax years ending after December 31, 2016. The 7.5% floor will apply to a married taxpayer if either the taxpayer or the taxpayers spouse is 65, whether they file a joint return or separate returns. Even if a spouse who files a separate return is under 65, the 7.5% floor will apply to that spouse for 2013 through 2016 if the other spouse is 65 or over.
Dollar cap on contributions to a health FSA (flexible spending account).
Beginning in 2013 for a health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and their dependents or other eligible beneficiaries) under the health FSA for a plan year (or other 12-month coverage period) cannot exceed $2,500. This is a maximum limit only. In the past an employer could have established its own plan limitations, as long as the plan limit didn’t exceed the statutory limit. This does not apply to health savings accounts (HSAs) or any contributions an employee makes toward health insurance.
Information reporting of health insurance coverage.
Employers filing 250 or more W2s were required to report the aggregate cost of the applicable employer sponsored health insurance coverage provided to the employees during 2012 on their Form W-2. This reporting to employees is for their information only. It is intended to inform them of the cost of their health coverage and doesn’t cause excludable employer-provided health coverage to become taxable. For small employers (those required to file fewer than 250 Forms W-2) reporting is optional for health coverage provided through 2012, or until further guidance is issued by the IRS. Thus these employers won’t have to report the cost of health care coverage on any forms required to be furnished to employees before January 2014 at the earliest.
