by The MDTAXES Network | Oct 5, 2012 | Taxes
On June 28th, the Supreme Court upheld most of the provisions of The Patient Protection and Affordable Care Act. Here are some of the tax increases that might affect you starting in 2013:
Increased and Expanded Medicare Taxes
High-income taxpayers will be paying higher Medicare taxes. Under the current rules, individuals have Medicare taxes withheld from their salaries at a rate of 1.45% on each dollar earned at work. Since employers match the amount withheld, Medicare receives a total of 2.9% for each payroll dollar paid out. And unlike Social Security taxes which max out at $110,100 (in 2012), there is no cap for Medicare taxes. Self-employed individuals also pay Medicare taxes at a rate of 2.9% on all of their net earnings.
Starting in 2013, the employee portion of the Medicare tax jumps by a whopping 62% – from the current rate of 1.45% to 2.35% – on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer match is slated to remain at 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers.
For example, if you’re single, and earn $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k – $200k) * .9%) for 2013.
For more information, check out the IRS’s Questions and Answers for the Additional Medicare Tax, which explains: The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee?s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual?s income tax return (Form 1040).
To increase taxes for high-income individuals even more, the Medicare tax will also apply to unearned income for the first time since this tax was enacted. People over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income beginning in 2013. You will pay this tax in addition to any federal and state income taxes due on this income. We’ll provide you a link to this form when it becomes available.
Reduced Tax Breaks for Medical Expenses
Many employers offer their staff the ability to pay for their family’s healthcare costs with pre-tax dollars through a Flexible Savings Accounts (FSA) included as part of their benefits package. Starting in 2013, the maximum amount of money that you can set aside in an FSA will be cut in half to $2,500 per year. Plus, medical expenses you can pay through the FSA will exclude certain items currently allowed, including OTC medications. Please note, if you are married, both you and your spouse can put away the full $2,500 through your respective employer’s FSA.
The Patient Protection Act also makes it even tougher for individuals to deduct their medical expenses. Starting in 2013, you can only deduct your family’s medical expenses to the extent the allowable expenses exceed 10% of your adjusted gross income. That’s an increase of one-third over today’s threshold of 7.5% of AGI.
This new rule may not impact your taxes, however, thanks to the dreaded Alternative Minimum Tax (AMT). Since the current threshold for deducting medical expenses under the AMT is already 10% of Adjusted Gross Income (AGI), many people who are hit by this tax every year might not see any tax increase due to this change.
Steps to Consider to Minimize These Taxes:
As with most other tax rules, there are ways to minimize the tax bite that will be caused by soon to be implemented changes to the Tax Code:
- Take a look at a Health Savings Account for your family.?? Money contributed into an HSA is tax-deductible, and money withdrawn for your family’s medical expenses is tax-free. We wrote about HSAs in our?MDTAXES? May 2012?Newsletter.
- Consider?selling appreciated investments in 2012 if you would otherwise sell them in 2013. No one know whether the tax rate on long-term capital gains will be higher than 15% in 2013. Add to this the 3.8% Medicare tax you’ll pay once your income exceeds $200k if single or $250k if married, and you could save a decent amount of taxes by selling by December 31st.
- Consider accelerating income into 2012 to reduce your 2013 income. This strategy includes one-time income generators, such as Roth Conversions.
by The MDTAXES Network | Aug 15, 2012 | Taxes
On June 28th, the Supreme Court upheld most of the provisions of The Patient Protection and Affordable Care Act. Here are some of the tax increases that might affect you starting in 2013:
Increased and Expanded Medicare Taxes
High-income taxpayers will be paying higher Medicare taxes. Under the current rules, individuals have Medicare taxes withheld from their salaries at a rate of 1.45% on each dollar earned at work. Since employers match the amount withheld, Medicare receives a total of 2.9% for each payroll dollar paid out. And unlike Social Security taxes which max out at $110,100 (in 2012), there is no cap for Medicare taxes. Self-employed individuals also pay Medicare taxes at a rate of 2.9% on all of their net earnings.
Starting in 2013, the employee portion of the Medicare tax jumps by a whopping 62% – from the current rate of 1.45% to 2.35% – on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer match is slated to remain at 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers.
For example, if you’re single, and earn $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k – $200k) * .9%) for 2013.
For more information, check out the IRS’s Questions and Answers for the Additional Medicare Tax, which explains:
The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee?s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual?s income tax return (Form 1040).
To increase taxes for high-income individuals even more, the Medicare tax will also apply to unearned income for the first time since this tax was enacted. People over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income beginning in 2013. You will pay this tax in addition to any federal and state income taxes due on this income. We’ll provide you a link to this form when it becomes available.
Reduced Tax Breaks for Medical Expenses
Many employers offer their staff the ability to pay for their family’s healthcare costs with pre-tax dollars through a Flexible Savings Accounts (FSA) included as part of their benefits package. Starting in 2013, the maximum amount of money that you can set aside in an FSA will be cut in half to $2,500 per year. Plus, medical expenses you can pay through the FSA will exclude certain items currently allowed, including OTC medications. Please note, if you are married, both you and your spouse can put away the full $2,500 through your respective employer’s FSA.
The Patient Protection Act also makes it even tougher for individuals to deduct their medical expenses. Starting in 2013, you can only deduct your family’s medical expenses to the extent the allowable expenses exceed 10% of your adjusted gross income. That’s an increase of one-third over today’s threshold of 7.5% of AGI.
This new rule may not impact your taxes, however, thanks to the dreaded AMT. Since the current threshold for deducting medical expenses under the AMT is already 10% of AGI, many people who are hit by this tax every year might not see any tax increase due to this change.
Steps to Consider to Minimize These Taxes:
As with most other tax rules, there are ways to minimize the tax bite that will be caused by soon to be implemented changes to the Tax Code:
- Take a look at a Health Savings Account for your family. Money contributed into an HSA is?tax-deductible, and money withdrawn for your family’s medical expenses is?tax-free (we wrote about HSAs in May 2012).
- Consider selling appreciated investments in 2012 if you would otherwise sell them in 2013. No one know whether the tax rate on long-term capital gains will be higher than 15% in 2013. Add to this the 3.8% Medicare tax you’ll pay once your income exceeds $200k if single or $250k if married, and you could save a decent ???? amount of taxes by selling by December 31st.
- Consider accelerating income into 2012 to reduce your 2013 income. This strategy includes one-time income generators, such as Roth Conversions.
by The MDTAXES Network | May 31, 2012 | Planning, Savings, Taxes
by Andrew D. Schwartz, CPA
In my last post, we covered some basics with insurance and Health Savings Accounts (HSAs).??Let’s continue by?reviewing some more?key?strategies you can do to minimize your healthcare costs and save taxes:
The Winning Combination
As health insurance costs continue to skyrocket, Health Savings Accounts (HSAs) provide you with a great opportunity. Assuming you and your family are relatively healthy, and you won’t choose to routinely forgo your annual physical to save a few hundred dollars in medical bills, start by switching to a high-deductible health insurance product. You will immediately realize a sizeable decrease in your monthly premium – generally equivalent to the increase in your annual deductible.
Next, open up and fully fund an HSA for the year. Don’t forget to deduct your HSA contributions on your tax return that year.
Assuming you and your family have a relatively healthy year, you will end up ahead of the game, since you get to keep all the money leftover in your HSA at the end of the year.
What happens if you incur substantial healthcare costs during the year? Yes, you will probably deplete your HSA. But once you spend the full amount of your annual deductible, your insurance takes over like insurance is supposed to do and protects you against any further financial hardship.
Bang For Your Buck
Are you ready for some more good news about HSAs? When these tax-advantaged healthcare savings accounts were first introduced back in 2004, the amount you could contribute into an HSA each year was a function of your annual deductible.
A few years ago, the rules were changed to make HSAs more attractive. For families, as long as your annual deductible is at least $2,400 (in 2012), you can contribute up to $6,250 into your HSA. Single individuals with a health insurance deductible of at least $1,200 in 2012 are eligible to deposit $3,100 into an HSA this year. Anyone 55 or older can contribute an extra $1,000 into an HSA this year.
What this new rule means to you is that you can put away almost triple your annual deductible. So even if you tap into your HSA to pay 100% of your deductible, you still have a decent amount of money left over growing tax-deferred to pay for future healthcare costs or to eventually help fund your retirement.
Survival of the Frugalist
Why not let your health insurance do it’s job and protect you and your family against the catastrophic? Then, couple this less expensive insurance with pre-tax contributions into an HSA, and you have discovered one strategy to minimize the after-tax cost of your family’s healthcare costs in today’s market.
For more information about HSAs (and some good bedtime reading), check out IRS Publication 969.
by The MDTAXES Network | May 24, 2012 | Planning, Savings
by Andrew D. Schwartz, CPA
You purchase insurance to protect yourself against the catastrophic.? Paying a few hundred dollars to fix a broken window in your garage won’t trigger a financial crisis for most households. Being forced to rebuild your two-car garage after it is flattened by a fallen tree is when you look to your homeowner’s insurance to come to the rescue.
Protection against the catastrophic describes?long-term disability insurance?as well (see my previous article if you’d like?an overview on long-term disability insurance). Miss a few days of work due to the flu, and you won’t be financially devastated, even if you have already used up all of your PTO (Paid Time Off) for the year. How financially devastating would it be if you end up missing a chunk of time at work and do not have adequate disability insurance coverage in place?
Assuming the purpose of insurance is to protect yourself against the catastrophic, please explain what happened to the health insurance industry. Most plans pay pretty much all of your health costs each year. Yes, you get hit with co-pays and a relatively modest annual deductible. But that’s about it for most people with traditional health insurance coverage.
When you think about it, however, there is a very good reason as to why the health insurance industry evolved into more of a payment program than a true insurance product. Leaders of the healthcare industry realized that it would be less expensive in the long-run for insurance companies to encourage people to seek out preventative care instead of paying for costly medical care that could have been avoided with earlier detection.
Now that consumers are better informed about preventative healthcare, let’s review a strategy that helps people not only reduce their health insurance premiums but also build up money within a tax-advantaged savings account.
HSAs
Back in 2004, President Bush introduced Health Savings Accounts (HSA). Only individuals or families covered under a high-deductible health insurance plan during the year are eligible to contribute to an HSA. For 2012, the minimum annual deductible to qualify as a high-deductible plan is $1,200 for individuals or $2,400 for families.
Here are four tax breaks available to you if you contribute to an HSA:
- Money contributed into an HSA is tax-deductible. Either you contribute into an HSA on your own, or your employer contributes on your behalf.
- Money invested within the HSA is your money and grows tax-deferred. Unlike Flexible Spending Accounts (FSA) offered to you as part of your employee benefit package where you set aside a set amount of money to pay for your family’s healthcare costs with pre-tax dollars, there is no “use it or lose it” pitfall with HSAs.
- Money can be withdrawn tax-free from your HSA at any time to pay for your family’s healthcare expenses.
- Any money remaining in your HSA upon your reaching the age of 65 is available to subsidize your retirement.
In my next post, we’ll look at why HSAs are a great Bang for your Buck.
