HEALTH CARE REFORM ACT - A FEW KEY TAX CHANGES

The following is a letter we sent to our clients regarding the recently passed Health Care Reform Act:

RE: Health Care Reform is Also Tax Reform

As I am sure you are aware, Congress just passed the massive Health Care Reform Act. You may not know that the bill includes many tax law changes that the Congressional Budget Office says the IRS will need $10 billion and 17,000 new employees to enforce its share of the new rules? It's true! Here are just a few key tax changes:

• Starting this year, certain small businesses with fewer than 10 employees will get a 35% credit for the cost of providing employee health benefits.
• Starting in 2011, employers will have to report the value of health benefits on Form W-2.
• The penalty tax for Health Savings Account distributions not used for health care expenses doubles, to 20%. This will discourage using HSAs for supplemental retirement savings.
• Starting in 2013, the 7.5% floor for deducting medical and dental expenses climbs to 10% (unless you or your spouse are 65 or older, in which case it remains at 7.5% until 2016).
• Healthcare flexible spending account contributions are capped at $2,500 per year.
• Starting in 2014, businesses with more than 50 employees will have to offer health benefits or pay a penalty of $2,000 per employee.

The reconciliation bill that accompanied the act includes one more unwelcome change. Currently, the Medicare tax is limited to 2.9% of earned income. The reconciliation bill raises that tax by 0.9% of earned income above $200,000 (individuals) or $250,000 (families). It also adds a 3.8% "Unearned Income Medicare Contribution" on investment income (interest, dividends, annuities, royalties, capital gains, and rents) for taxpayers with Adjusted Gross Incomes above those same thresholds. Those new taxes would take effect in 2013.

The complete bill is 1,018 pages long! So it's going to take some time to analyze. But we'll pay close attention and keep you informed as details become available. Watch our website for our upcoming FREE Health Care Reform Webinar. You may also check out our Small Business Health Care Tax Credit Savings Worksheet on our webite. In the meantime, if you have any questions, be sure to call us at 1.800.975.4829.

It is a pleasure serving you.

Larry Kopsa CPA

START PLANNING NOW FOR THE NEW MEDICARE SURTAX

I have been getting queries on the Medicare surtax, which is the the key revenue raiser in the new health reform law. First, the new tax does not take effect until 2013 but now is the time to start planning. Here is how the surtax works and how it will affect your tax planning strategies.

There are actually two surtaxes in the law:

• The first is a 0.9% levy on earned income, covering wages and income from self-employment. Singles owe the 0.9% surtax once total earnings are more than $200,000 - couples…over $250,000. That makes the effective Medicare tax on earnings over the thresholds 3.8%...the usual 2.9% rate plus the 0.9% surtax. In addition, self-employed taxpayers will not be able to deduct the surtax as part of their deduction for half their SECA tax.

• The second surtax is a special 3.8% Medicare surtax on unearned income of single filers with modified adjusted gross income (AGI) over $200,000 and joint filers above $250,000. Modified AGI is AGI less any excluded foreign earned income. The surtax is levied on the smaller of the filer’s net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income, but not tax free interest or payouts from retirement plans such as regular IRAs, Roths, profit sharing plans and defined benefit plans.

For example: A couple with $50,000 of investment income and AGI of $270,000 will pay $760 (3.8% on the $20,000 excess over $250,000.) A single taxpayer with AGI of $300,000 and $50,000 of investment income will pay an additional $1,900 (3.8% of $50,000.)

Note the effect on capital gains and dividends. The maximum rate on both is currently 15%. If Congress adopts Obama’s budget plan to let the top rate rise to 20% for taxpayers, the surtax would effectively bump it to 23.8%. However, if Congress lets dividends be taxed as ordinary income again and sets the top rate at 39.6%, the surtax makes the maximum rate 43.4%, nearly triple the current levy. Add to that state taxes and you are well over a 50% tax rate.

Larry Kopsa CPA

WASHINGTON REFORMS HEALTH CARE AND TAXES

Sunday's night's health care bill will go down as one of those once-in-a-generation accomplishments. I'm not here to debate the merits of the bill - historians will still be doing that decades from now. But it's important to point out some important tax changes included in the bill and the companion "reconciliation" bill now before the Senate. (Just how important are they? Well, the Congressional Budget Office says the IRS will need $10 billion and 17,000 new employees to enforce its share of the new rules!)

Here are some of the key tax provisions:

• Starting immediately, certain small businesses with less than 10 employees will get a 35% credit for the cost of providing employee health benefits.
• Starting in 2011, employers will have to report the value of health benefits on Form W2.
• The penalty tax for Health Savings Account distributions not used for health care expenses doubles from 10% to 20%. This will discourage using HSAs for supplemental retirement savings.
• Starting in 2013, the 7.5% floor for deducting medical and dental expenses climbs to 10% (unless you or your spouse are 65 or older, in which case it remains at 7.5% until 2016).
• Healthcare flexible spending account contributions are capped at $2,500 per year.
• Starting in 2014, businesses with more than 50 employees will have to offer health benefits or pay a penalty of $750/employee.

The reconciliation bill includes one more unwelcome surprise.

• Currently, the Medicare tax is limited to 2.9% of earned income (earned income is income from wages and self employment like business, partnership and LLC income). The reconciliation bill imposes an additional Medicare tax of 0.9% on earned income above $200,000 (individuals) or $250,000 (families).
• It also adds a 3.8% "Unearned Income Medicare Contribution" on investment income - specifically, interest, dividends, annuities, royalties, capital gains, and rents - for taxpayers with Adjusted Gross Income above those same thresholds. Those new levies would take effect in 2013.

The complete bill is 1,018 pages, so it's going to take some time to analyze. But we'll be paying close attention as details become available. In the meantime, email us with any questions.

Larry Kopsa CPA

HEALTHCARE REFORM BILLS WOULD REQUIRE RESTAURANTS TO DISCLOSE CALORIES

US News Weekly reports that for the "most part, the Democrats' healthcare reform legislation focuses on insurance coverage and insurance reforms," but "there are proposals on the table, experts say, that at least begin to address the obesity problem. In one of the more far-reaching approaches, both the House bill...and Senate Majority Leader Harry Reid's bill...would require that all large fast-food chains and restaurants put calorie labels on their menus and displays."