New Healthcare Tax Laws

Dealing with Healthcare Reform's New Tax Laws

By Debbie Zarzycki , CPA

Now that Congress has passed a landmark healthcare reform package, much work needs to be done by business owners in order to deal with the new requirements. While the end result of the legislative process is related to expanding healthcare coverage, new tax law plays a major role in its implementation. From the tax credits and subsidies used to expand health coverage, to the many penalties, fees and surtaxes designed to pay for it, the Tax Code is front and center.

New taxes and penalties. Viewing the historic healthcare reform package from the context of the Tax Code, many new taxes and penalties stand out immediately above the rest. We've selected some of the top provisions to highlight below:

• Health insurance tax credit for small employers: Starting in 2010, employers with 10 or fewer employees and average annual wages of less than $25,000 can receive a credit up to 35% of their health insurance costs. A reduced credit is available for employers with up to 25 employees, paying an average of $50,000 annual wages. In order to be eligible, the employer has to pay at least 50% of the employees' health insurance coverage. The credit is available through 2013.
• Health related breaks for adult children: Effective for plan years beginning after September 22, 2010, health plans that cover dependent children must continue to cover them through age 26. In conjunction with this new provision, the employer benefit remains tax-free as long as the child(ren) haven't reached age 27 by the end of the year.
• New W-2 reporting requirement: Beginning with 2011 Form W-2's, employers are required to report the value of health insurance benefits they provided on each employee's W-2. NOTE: The amount reported is not considered additional taxable income.
• Additional 0.9 percent Medicare tax on salaries: Starting in 2013, individuals who earn more than $200,000 for the year ($250,000 for married couples) will pay an additional 0.9 percent in Hospital Insurance (Medicare) tax. The extra 0.9 percent tax will be charged on salaries and/or self-employment income above the $200,000/$250,000 thresholds.
• Additional 3.8 percent Medicare tax on net investment income: Also starting in 2013, individuals whose adjusted gross income for the year exceeds $200,000 ($250,000 for joint filers), whether from wages or otherwise, will also pay an additional 3.8 percent Medicare tax on net investment income (long-term capital gains, interest, dividends, royalties, rents). The 3.8 percent levy will hit the lesser of (1) net investment income or (2) the amount by which adjusted gross income exceeds the $200,000/$250,000 threshold amounts.
• Higher threshold for itemized medical expense deductions: Starting in 2013, the itemized medical expense deduction floor for regular tax purposes increases from 7.5 percent to 10 percent. This provision is delayed for individuals age 65 or older at year-end until 2017.
• New penalty for not offering adequate health insurance coverage: Starting in 2014, employers with 50 or more employees that do not offer coverage or offer coverage that does not meet new minimum essential coverage requirements will pay a penalty per employee. In addition, most individuals will be required to obtain health insurance or be subject to a penalty tax starting in 2014.

Over the course of the next months and years, the IRS and other federal agencies will be filling in details on how to comply with all the provisions under the massive healthcare reform package. So, what should you be doing right now to prepare for complying with the new tax law? Here’s a few ideas you might consider in order to get ready to move into this new realm of taxation:

1. If you think your business may qualify for the healthcare credit, contact your tax advisor to estimate the projected savings.

2. Or, if you are a larger company (more than 50 employees), you may want to estimate the additional financial burden of providing the minimum health insurance coverage starting in 2014 for all your employees.

3. And for those individuals reading this whose income surpasses the $200,000 ($250,000 for joint filers) threshold, you may want to project the impact the additional Medicare taxes are going to have on your checkbook.

Our office will be staying on top of all developments, with an eye toward how to best minimize impacts under the new law for our clients. We are prepared to advise our clients on all compliance rules and tax-reduction opportunities that undoubtedly will arise.

In the meantime, if you have any questions about the new law, please do not hesitate to give us a call at 800-487-7624.