Health Care Act & Closing Tax Loopholes

In our last newsletter we discussed the expiring provisions of the Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) along with the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).   In this newsletter we will be focusing on the Health Care Act and the American Jobs and Closing Tax Loopholes Act of 2010.  The recent enactment of the Patient Protection and Affordable Care Act of 2010, in combination with the Health Care and Education Tax Credits Reconciliation Act of 2010 (collectively known as the "Health Care Act" or the "Act"), significantly changes the nation's health care landscape, and many of these changes will be carried out through substantial additions and alterations to the U.S. tax code.  While the final details of these provisions are still being ironed out the following is a summary of the current outlook. 

In tax years beginning after December 31, 2010 there will be a significant tax change impacting shareholders of S-Corporations.  H. R. 4213, The American Jobs and Closing Tax Loopholes Act of 2010, passed by the House of Representatives at the end of May of this year, will impose social security and Medicare tax on a shareholder's pro rata share of all income items.  The provision does not apply to all S-Corporations, only those engaged in the professional services business principally based on the reputation and skill of three or fewer individuals or an S-Corp that is a partner in a professional service partnership.  This bill, if enacted in its current form, effectively makes all S-Corporation earnings subject to self employment tax.

Effective 2011 the Health Care Act will change the face of an employee's Form W-2.  It will require employers to disclose the value of the employee's health insurance coverage sponsored by the employer.  This is for disclosure purposes only and there will be no additional tax to employees.   However this has turned into a hotly debated item going forward, leading many to question the motivation and purpose of such a disclosure.

Moving forward to 2012 the Health Care Act will also change 1099 filing requirements, making all payments to corporations aggregating  more than $600 paid during the calendar year subject to the filing requirement.  Payments include disbursements for property.  This means that if you bought multiple items in numerous orders throughout the year from one company, the filing requirement has been met.  As an example, you will be required to file a 1099 for purchases of supplies from Staples or Office Depot at the end of the year if over $600. It is projected that payments made by credit card and debit cards will be exempt from the requirement.

Beginning in 2013 under the Health Care Act there will be an additional Medicare tax on earned income exceeding certain thresholds.  The income threshold levels are not indexed for inflation and the amounts are $250,000 for married filing joint, $125,000 married filing separate and $200,000 for all others.  Individuals above the thresholds will pay an additional 0.9% Medicare Hospital Insurance tax (HI) on wages and self employment income.    Under the current law there is a 2.9% tax on earned income without limit.  Half is withheld from the employee and half is paid by their employer or if self employed, the individual pays the entire amount.  The new law will only increase the employee's portion. 

The Health Care Act will also impose an additional Medicare tax on Investment Income.  Under current law Medicare Hospital Insurance tax (HI) is imposed only on earned income.  Beginning in 2013 individuals, estates, and trusts will be taxed 3.8% on investment income in excess of certain defined thresholds.  The tax for individuals is 3.8% of the lesser of net investment or the excess of modified adjusted gross income over the threshold ($250,000 married filing joint, $125,000 married filing separate and $200,000 for all others).  Net investment income is defined as investment income reduced by applicable deductions allocable to such income.  Investment income includes: dividends, interest, annuities, royalties, rents, net taxable gain from the disposition of property not held in a trade or business, and other gross income from trade or business under which the HI tax applies.

The following are some additional items included in the Health Care Act.  Beginning in 2013 the threshold for the itemized deduction for medical expenses will increase from 7.5% to 10% of AGI.  Also in 2013 there will be a $2,500 annual contribution limit on Cafeteria Plans (a tax sheltered salary reduction for qualified medical expenses).  Under current law there is no limit.

Another item you might have heard about lately is the penalty for failure to maintain health insurance coverage which is effective in 2014. Individuals and employers can both be fined.   I will not go into great detail on this item since the rules are lengthy and it is still relatively far out but within the new law is a requirement for US citizens and residents to have qualifying health insurance.  I suspect this rule is probably the motivation for the 2010 W-2 disclosure requirement for employer sponsored health insurance coverage discussed above.

Given the scope of this landmark legislation, this short summary is by no means a comprehensive review of the new laws.  As your tax professionals at Dawson & Associates, we will keep up to date on the changing environment and keep you informed regarding the health care reform's tax implications for you and your business.