Tax Provisions Affected by Health Care Reform 2013

Information Reporting on Health Insurance Coverage

Large employers must report, on an employee’s 2012 W-2, issued in 2013, the cost of health insurance coverage under an employer-sponsored group health plan.

For more information on information reporting on health insurance coverage, go to IRS Notice 2010-69 or the IRS website.

Allowable Contributions to Health Flexible Spending Arrangements

Allowable contributions to health FSAs will be capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012.  On May 31, 2012 Treasury released IRS Notice 2010-40 which provides that the $2,500 annual limitation on contributions to FSA’s available through employer-sponsored cafeteria plans takes effect on January 1, 2013 for calendar year plans only. 

For more information on allowable contributions to health flexible spending arrangements, go to the IRS website.

Medical Care Itemized Deduction Threshold

The floor for itemized medical expense deductions will be raised from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Additional Hospital Insurance Tax on High-Income Taxpayers

The employee portion of the hospital insurance tax part of FICA, currently amounting to 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

The provision applies to remuneration received and tax years beginning after Dec. 31, 2012.

3.8% Medicare Tax on Net Investment Income

Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on a taxpayer’s net investment income – interest, dividends, royalties, rents, passive activities, and net gains from sales of property not held in a trade or business – of single taxpayers with AGI above $200,000 and joint filers over $250,000.

UPDATE:

On December 3, 2012, the IRS released proposed regulations governing the 3.8% net investment income tax imposed under section 1411.  Taxpayers can rely on the proposed regulations until final regulations take effect.  The IRS has also released Net Investment Income Tax FAQs to assist taxpayers in understanding the 3.8% tax.

.9% Medicare Surtax

Beginning in 2013, there will be an additional .9% tax on FICA wages, compensation, or self-employment income exceeding $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately; and $200,000 for taxpayers claiming single, head household or qualifying widower status. 

Employers are responsible for the collection of the tax through withholding for employees with wages greater than $200,000.  The employer will not be responsible for collecting the tax for taxpayers filing joint returns where neither spouse earns greater than $200,000 but when their earnings are combined they total more than $250,000.  In these cases, the employee will be responsible for making the payments by requesting added withholding from their employers or through estimated tax payments.

UPDATE:

On November 30, 2012 the IRS and Treasury released proposed regulations to help employers and individuals implement the new tax.

Excise Tax on Medical Device Manufacturers

Beginning in 2013, a tax equal to 2.3% of the sale price will be imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of the device. The tax does not apply to individual consumers.

Report the medical device excise tax quarterly on Form 720, Quarterly Federal Excise Tax Return.  The first return is due April 30, 2013 for the period January through March 2013.  The form may be filed electronically or on paper.  The tax is due with the return.

For more information on the excise tax on medical device manufacturers, see the IRS website.

UPDATE:

On December 5, 2012 the IRS and Treasury issued final regulations on the excise tax.  The regulations define the term “taxable medical device” and also provide guidance on the types of items that are excluded from the tax under the retail exemption. The regulations are effective on Decembre 7, 2012 and applicable to sales of taxable medical devices after December 31, 2012.

In addition to the final regulations, on December 5, 2012, the IRS and Treasury also issued Notice 2012-77 providing interim guidance regarding the determination of sale price and other issues not addressed in the final regulations, such as guidance on donated taxable medical devices, licensing taxable medical devices, and the tax treatment of medical convenience kits.

Deductions for Federal Subsidies for Retiree Prescription Plans

Effective in 2013, the rule that the exclusion for subsidy payments is not taken into account for purposes of determining whether a deduction is allowable for retiree prescription drug expenses will be eliminated. Employers that currently receive a federal subsidy for providing retiree prescription drug coverage (Retiree Drug Subsidy) will no longer be able to take a deduction for those retiree drug expenses with respect to that subsidy as of 2013.

The Retiree Drug Subsidy remains, but employers’ ability to deduct the amount of the subsidy is eliminated.  This change increases an employer’s income tax liability, in effect increasing the employer’s cost of providing prescription drug coverage to retirees.  The amount by which an employer’s tax liability will increase depends on the total amount of the subsidy and the employer’s applicable corporate tax rate.