TheSupreme Court recently upheld most of the Patient Protection and AffordableCare Act (PPACA), aka “Obamacare”, and the idiots in Congress have beenunsuccessful in 30+ attempts to repeal the Act. So it looks like we better prepare ourselves for the provisions thatwill become effective in 2013.
· Currentlyyou will only receive a tax benefit for your medical expenses if you itemize onSchedule A and the total of your allowable expenses exceeds 7½% of yourAdjusted Gross Income (AGI). If yourexpenses total $6,500 and your AGI is $80,000 your deduction is $500 ($80,000 x7½% = $6,000 / $6,500 - $6,000 = $500).
Beginningwith 2013, the exclusion rises to 10% of AGI. In the above example there would be no deduction, as 10% of $80,000 =$8,000, and $6,500 - $8,000 = 0.
Underthe dreaded Alternative Minimum Tax medical expenses are only deductible to theextent they exceed 10% of AGI.
Inreality, the allowable medical expenses of most taxpayers do not exceed thecurrent 7½% exclusion – so, unfortunately, the change will only affect thosewith excessive medical expenses and, in my client base, retired seniors withlower AGIs.
· Thereis currently no statutory limit on the amount that employers can permitemployees to contribute to a medical expense Flexible Spending Account (FSA). The limitation is set by the individual plan.
Beginningwith 2013, employee contributions to an employer-provided medical expense FSAis limited to $2,500 per year. Thisamount will be indexed annually for inflation.
Havingmedical expenses paid through an FSA is a way of getting a tax deduction formedical expenses “above-the-line” that were not allowed on Schedule A due tothe AGI exclusion. I have often seen asmuch as $5,000 in FSA contributions for my clients – so this change willincrease these taxpayers’ liability by $600-$700.
• Employeesand employers split the cost of Social Security and Medicare tax (FICA) – eachpays 6.2% of taxable wages for Social Security and 1.45% for Medicare (althoughfor 2012 the employee pays only 4.2% of his/her taxable wages). There is a limit on the amount of taxablewages subject to the Social Security portion, but the Medicare tax is appliedto all taxable wages. Taxable wages forFICA may be different that taxable wages for income tax.
Self-employed taxpayers pay bothhalves of the FICA tax as “self-employment tax”, again with a 2% reduction inthe Social Security component for 2012. They are allowed an “above-the-line” deduction for a portion of theself-employment tax assessment.
Beginning in 2013, the employee’sshare of the Medicare tax increases by 0.9% - to 2.35% - for taxable wages over$200,000 ($250,000 for joint filers and $125,000 for married couples filingseparately). The self-employment tax issimilarly increased on these levels of income.
• Beginningin 2013, a new tax is added on the Form 1040 for taxpayers with “modified” AGI (MAGI)over $200,000 (again $250,000 for joint filers and $125,000 for married couplesfiling separately. These taxpayers willbe subject to a 3.8% “surtax” on “net investment income”.
Net investment income is taxable interest,dividends, capital gains, annuities, royalties, rents, and pass-through incomefrom a passive S-corporations and partnership, less related investment expensededuction. Modified AGI is regular AGIwith any foreign earned income exclusion or foreign housing exclusion addedback.
This change is the source of thenonsense email that has been circulating for the past year that there is a federal“sales tax” on the profit from the sale of your personal residence. See my post “WTF?”.
TTFN
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