A Quick Summary of New Tax Law Signed to Avoid Fiscal Cliff

The American Taxpayer Relief Act of 2012 was signed by the President on January 2, 2013. The following is a quick summary of some of the more important provisions.

Payroll taxes. The most visible tax change in the new tax law is the 2% increase in the payroll tax. Everyone who draws a paycheck or has self-employment income will pay more in 2013. If you have $40,000 in wages in 2013, you will pay an additional $800 of payroll taxes over what you paid in 2012 on the same amount of wages.

Tax rates. The new law keeps the income tax rates the same as they were in 2012 for most taxpayers and makes them permanent. The new 39.6% tax rate will apply to single taxpayers making over $400,000 and couples making over $450,000.
Itemized deductions. The law puts limitations on the itemized deductions and personal exemptions for singles making over $250,000 and married couples making over $300,000.

Long-term capital gains.  The long-term capital gains rate will be 20% for singles making over $400,000 and couples making over $450,000. The prior 15% and zero rates will continue to apply to those in the lower brackets as they did in 2012.

Tax-free distributions to charity. The tax-free distribution to charity from an IRA by a taxpayer age 70½ or older is extended through 2013. Special rules apply to December 2012 and January 2013 distributions if the transfer is made to the charity by January 31, 2013.

Education. A number of education tax incentives were extended or made permanent in the new tax law.

Child tax credit. The new law makes permanent the $1,000 child tax credit.

The alternative minimum tax (AMT) has been permanently patched with a 2012 exemption amount of $50,600 for unmarried taxpayers and $78,750 for married taxpayers. The exemption amount will be adjusted annually for inflation.

Depreciation. On the business front, the 50% bonus depreciation and the $500,000 business expensing option are extended through 2013. There are also numerous business tax incentives extended through 2013.

There is much more in the new tax law. Please contact us for a review of your tax considerations under the American Taxpayer Relief Act of 2012.

Obamacare: What is the Latest on Health Care Reform?

Taxes and government spending are going to be on the agenda in Washington during 2013. Where does that leave health care reform, the legislation passed in 2010 overhauling the health care system in this country?

Here’s a quick update that covers provisions in the health care legislation that went into effect prior to 2013 and those that, absent any changes made in the coming months, go into effect in 2013 and thereafter.

The following provisions have already taken effect:

  • A 10% tax is assessed on indoor tanning services.
  • Small businesses with fewer than 25 full-time employees may qualify for a tax credit for the cost of purchasing health insurance for their employees.
  • Children can remain on their parents’ insurance policies up to age 26. Private lending for student loans is replaced with loans directly from the federal government, cutting loan fees.
  • A 50% discount on brand-name drugs for those with Medicare drug coverage helps to offset costs  in the “donut hole.”
  • Over-the-counter medications can no longer be paid for with funds in health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement accounts (HRAs).
  • The additional tax on nonqualified distributions from health savings accounts (HSAs) increases from 10% to 20%.

The provisions that will take effect in 2013 include the following:

FSA limits

  • The amount that can be contributed to a health flexible spending account (FSA) is limited to $2,500 per year, indexed annually for inflation.

Medical expense deduction

  • The 7.5% income threshold for deducting unreimbursed medical expenses increases to 10% for those under age 65. Those 65 and older may continue to take an itemized deduction for medical expenses exceeding 7.5% of adjusted gross income through the year 2016.

Executive pay limit

  • The compensation deduction for certain health insurance companies is limited to $500,000 per year for high-level executives.

Medicare tax increase

  • The payroll Medicare tax will increase from 1.45% of wages to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns. The income threshold levels are not indexed for inflation.
  • A new 3.8% Medicare tax will be imposed on unearned income for single taxpayers with income over $200,000 and married couples with income over $250,000. Examples of unearned income: interest, dividends, royalties, rental income.

Medical device tax

  • A 2.3% excise tax is imposed on the sale of certain medical devices.

Provisions scheduled to take effect in years after 2013 include the following:

Coverage required starting in 2014

  • Individuals who are not covered by Medicare, Medicaid, or other government health insurance are generally required to maintain health insurance coverage or pay a penalty. Penalties are calculated using a percentage of the taxpayer’s income or a flat dollar amount. Subsidies and tax credits are available to help lower-income taxpayers pay for coverage.
  • Health insurance exchanges are established by states to enable people to comparison shop for coverage.
  • Large employers generally must provide coverage for employees or face penalties.
  • Tax credits increase from 35% to a maximum 50% of premiums paid by qualifying small businesses that provide coverage for their workers. The credit available to nonprofit employers increases from 25% to 35%.

Health industry fee in 2014

  • An annual fee is assessed on the health insurance industry, starting at $8 billion in 2014 and increasing over the following years.

Tax on “Cadillac plans” in 2018

  • Insurance companies will be assessed a 40% excise tax on health insurance plans with annual premiums exceeding $10,200 for individual coverage and $27,500 for family coverage. An increase in the threshold amount is allowed for retired persons who are age 55 or older (an additional $1,650 for single coverage and $3,450 for family coverage). These increased thresholds also apply for plans that cover those engaged in high-risk occupations.

Certain provisions in the original health reform legislation have already been changed or repealed. For example, the law originally required Form 1099 reporting for payments over $600 made to corporations. That requirement has been repealed, and reporting is again generally required only for payments over $600 made to unincorporated businesses.

Congress may amend or repeal provisions in the health care reform law, either before their scheduled effective date or retroactively. Or the law may survive largely intact. Clearly, the massive law will affect every taxpayer. For guidance in your individual and business tax planning under the often-complicated health reform legislation, contact our office at 516-280-8363.

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