The health care law makes several changes to taxes that mostly affect families with incomes above $200,000 or $250,000 for couples.
You may notice on your W-2 form that your employer has reported the cost of your group health insurance benefits. 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. No Medicare taxes will be withheld on this amount.
Your Medicare taxes will not increase if you earn less than $200,000, or less than $250,000 for a couple filing a joint tax return. The portion of your earnings that are less than $200,000 (or $250,000 for a couple) will continue to be taxed at 1.45%.
If you earn more than $200,000 as an individual taxpayer, or more than $250,000 for a couple, you will see a small increase in the amount you owe for Medicare taxes beginning in 2013. The tax rate on the portion of your earnings above these amounts will increase from its current rate of 1.45 percent to 2.35 percent.
Your employer will continue to pay the employer’s portion of the tax at 1.45% on all of your earnings and withhold the employee portion of the tax. However, since your employer is not privy to information about your full household income and tax obligations, your paycheck’s Medicare withholding amount might be insufficient. To avoid owing money at tax time due your employer not withholding enough, you may want to increase the amount withheld in the beginning of 2013. Married couples making more than $250,000, individuals working at multiple jobs, and those who are self-employed should pay particularly close attention to the amounts being withheld.
Taxes on investment income
Starting in 2013, if your income is more than $200,000 as an individual taxpayer (or $250,000 for a couple), you will pay a 3.8 percent tax on some of your investment income. Taxpayers with income less than $200,000 (or $250,000 for a couple filing a joint tax return) will not pay higher taxes on their investment income.
Not all investment income is taxed. The tax applies to interest, dividends, annuities, royalties, rents and capital gains that are subject to income tax. It does not include income from Social Security, pensions, IRA distributions, or qualified IRA annuity payments.
To figure out the amount of the tax, subtract $200,000 (for an individual) or $250,000 (for married couples filing jointly) from your modified adjusted gross 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.
Check with the IRS or your tax advisor for additional tax information.
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. If you have an FSA, starting in 2013 the maximum contribution will be $2,500. That limit will increase in future years depending upon inflation. Over-the-counter medications, such as aspirin and cold medications, can only be reimbursed by your FSA if they are specifically prescribed by a doctor .
Medical expense deductions
If you itemize your tax deductions, beginning in 2013 you will be able to deduct only those medical expenses that exceed 10 percent, not the current 7.5 percent, of your adjusted gross income.
For example, if your adjusted gross income is $100,000 and your medical expenses are $12,000, you will be able to deduct $2,000 in medical expenses: $12,000 - [$100,000 x 10 percent or $10,000 ) = $2,000. The floor will remain at 7.5 percent until 2016 for people who are 65-plus or are married to a spouse who is 65 or older.
New tax on "Cadillac" health plans
Starting in 2018, your insurer will pay a 40 percent tax on the portion of your health benefit premiums that are above $10,200 for individual plans and $27,500 for family plans. The thresholds increase to $11,850 and $30,950 for some younger retirees who are not yet eligible for Medicare, as well as for people in high-risk occupations. All threshold levels will be indexed for the cost of living after 2018. If you are self-employed and get your insurance through a group health plan, your plan insurer will also have to pay the tax.
You will not directly pay this so-called "Cadillac plan tax" because your insurer owes the tax. An insurer could be an insurance company, your employer, or a third party that handles your employer's health plans. It will be up to your insurer to determine if it will pass the cost of the tax onto you or onto your employer.