Prior-year health care reform law changes 2013 tax rules

The 2010 health care reform legislation included several provisions that go into effect this year. Among them is the increase in Medicare taxes for taxpayers with incomes above certain levels. Here are some of the changes that could affect you.

  • Medical expense itemized deduction. The 7.5% income threshold for deducting unreimbursed medical expenses increases to 10% for taxpayers under age 65. Those 65 and older may continue to use the 7.5% threshold through the year 2016.
  • FSA contributions. The limit on contributions to health care flexible spending accounts (FSAs) is lowered to $2,500.
  • Medicare tax on earned income. 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 tax increase will also apply to self-employment income exceeding the threshold amounts.
    Employers are required to withhold the additional tax from wages exceeding $200,000, regardless of the individual’s filing status. They are not required to inform the employee when they begin the additional withholding, nor are they required to match the additional withholding.

  • Medicare tax on unearned income. There is a new 3.8% Medicare tax on unearned income for single taxpayers with adjusted gross income over $200,000 and married couples with income over $250,000. The tax will apply to the lesser of (a) net investment income, or (b) the amount by which modified adjusted gross income exceeds the $200,000/$250,000 thresholds. The tax may require adjustments to the estimated taxes paid by an individual, but it does not have to be withheld from wages.

Examples of unearned income include interest, dividends, capital gains, royalties, and rental income. Social security benefits, alimony, tax-exempt interest, and distributions from most retirement plans are examples of unearned income not subject to this new tax.

Tax filing reminders for March

  • March 15 – 2012 calendar-year corporation income tax returns are due.
  • March 15 – Deadline for calendar-year corporations to elect S status for 2013.

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