Fact Sheet: The Health Care Law and Tax Implications for Individuals

W-2 forms

You may notice on your W-2 form that your employer has reported the cost of health insurance benefits provided to you. Reporting the cost of coverage under an employer-sponsored group health plan is optional for W-2 forms issued for 2010. It will be required starting in 2012 . The new reporting will not affect the taxes you pay. The value of any health insurance benefits reported on your W-2 should not be included in your income when you file your taxes. You also will not be required to pay any FICA taxes on this amount.

Medicare taxes: Medicare taxes will not increase for individuals earning less than $200,000, or $250,000 for couples. The tax rate change will increase the amount withheld from your salary or wages, or the tax you pay on self-employment income, only if you exceed those income levels.

If you earn more than $200,000 as an individual taxpayer, or more than $250,000 and you file a joint tax return with your spouse, you will see an increase in a portion of your Medicare Part A tax rate beginning in 2013, when the tax rate will go from its current 1.45 percent to 2.35 percent. However, you will pay the 2.35 percent rate only on the portion of earnings that exceeds $200,000 for individuals or $250,000 for couples. Earnings below $200,000 (or $250,000 for couples) will continue to be taxed at 1.45 percent. And the 1.45 percent Medicare tax that your employer pays on your behalf will not change.

Flexible Spending Accounts (FSA)

Some employers offer flexible spending accounts that allow you to set aside part of your salary — before it is taxed — to help pay for some of your medical expenses. Starting in 2013, $2,500 will be the most you can contribute to an FSA. (That limit will be increased in future years to stay in line with cost-of-living increases.) Beginning in 2011 FSA reimbursements were no longer available for over-the-counter medications, such as aspirin or cough-and-cold medications, unless they are prescribed by your doctor.

Medical expense deductions

Taxpayers can currently deduct the portion of medical expenses that exceed 7.5 percent of their adjusted gross income. Beginning in 2013 that deduction can include only those medical expenses that exceed 10 percent of your taxable income.

For example, if your adjusted gross income is $100,000 and your medical expenses are $11,000, you can currently deduct $3,500: $11,000 - $7,500 ($100,000 x 7.5 percent) = $3,500. Starting in 2013 you will be able to deduct $1,000 in medical expenses: $11,000 - $10,000 ($100,000 x 10 percent) = $1,000. The deduction percentage will remain at 7.5 percent for people 65 and older until 2016.

New tax on "Cadillac" health plans

Starting in 2018, if your health benefits are worth more than $10,200 for individual plans and $27,500 for family plans, your insurers will pay a new 40 percent tax on the amount that your benefits exceed these threshold levels. The levels increase to $11,850 and $30,950 for some retirees who are 55 or older and not eligible for Medicare as well as for people in high-risk occupations. The threshold level will also increase for companies that pay higher premiums due to the age and gender of their workers. All threshold levels will be indexed for the cost of living after 2018. If you are self-employed but are covered through a group health plan, your plan insurer will have to pay the tax.

You won't directly pay this so-called "Cadillac tax" since the tax is on your insurer. For the purposes of this law, an insurer could be an insurance company, your employer, or a third party that handles your employer's self-insured plan, flexible spending account, or health savings account. It will be up to your insurer to determine if it will pass the cost of the tax on to you or your employer.

Taxes on investment income

Taxpayers earning less than $200,000 (or $250,000 for a couple) will not pay higher taxes on their investment income. Starting in 2013, if you earn more than $200,000 as an individual taxpayer, or more than $250,000 and file a joint tax return with your spouse, you will pay a 3.8 percent tax on your net investment income. Net investment income includes interest, dividends, annuities, royalties, rents and capital gains. Net investment income does not come from Social Security, pensions, or IRA distributions or qualified IRA annuities.

Not all investment income is taxed. To figure out the amount of the tax, subtract $200,000 (for an individual) or $250,000 (for married couples filing jointly) from your taxable income. Then compare the result with your net investment income. Multiply the lesser amount by 3.8 percent to get the amount of the tax.

For example, a married couple with a modified adjusted gross income of $275,000 and a net investment income of $10,000 would pay $380 in taxes on their net investment income: $275,000 - $250,000 = $25,000, which is larger than $10,000. Multiply that $10,000 by 3.8 percent to get a tax due amount of $380.