How the Recent Supreme Court Ruling Affects What You Should Do Now

by Marie Jett, CPA | Manager, Tax Services Group and
Larry Greenwalt, CPA | Chairman of the Board

On June 28, 2012 the Supreme Court, in a split 5 to 4 decision, upheld the individual mandate part of the Health Care Reform that each person must have health insurance. With the Supreme Court ruling behind us, we want to highlight the major tax and healthcare provisions that will affect taxpayers.

Key Healthcare Provisions

1. Insurance premiums of individuals with income up to 400% of the poverty line will be subsidized in 2014 for those joining state exchanges.

2. Children must be able to be covered through age 26, which is already in place.

3. Insurers must provide insurance to anyone regardless of health status, effective in 2014.

4. Requirement that individuals in same age group pay same premium regardless of health status, effective in 2014.

5. Health insurance exchanges begin in 2014.

6. Beginning in 2014 insurers cannot discriminate based on a pre-existing condition.

Key Tax Provisions – 2012

1. W-2 Reporting – For 2012, employers that filed 250 or more W-2s in the preceding year (2011) will be required to report the cost of employer-provided health insurance in box 12, using Code DD. (This does not yet make it taxable to the employee).

2. Summary of Benefits Coverage must be completed by September 23, 2012. Your carrier should be working on this with you.

Key Tax Provisions – 2013

1. Medicare tax – Employee portion of Medicare tax increases by .9% for wages over $250,000 for married taxpayers ($200,000 for single). Employers must withhold this on wages above $200,000.

2. Investment income tax – Married taxpayers with income above $250,000 ($200,000 for single) will have an investment income tax of 3.8% on the lower of net investment income or modified adjusted gross income above the threshold. Investment income includes, interest, dividends, capital gains, annuities, net rental income, and passive income from partnerships and S-Corporations. It does not include municipal bond interest or active trade/business income. Distributions from qualified plans (IRAs, 401k and pension plans) are not subject to this tax.

3. FSAs – Only $2,500 of medical expense reimbursements will be allowed from a flexible spending arrangement for plans beginning in 2013. The $2,500 will be indexed to the CPI starting in 2014.

4. Itemized Deduction Threshold – Currently, medical expenses above 7.5% of adjusted gross income are deducted as an itemized deduction. Effective 1/1/2013, this threshold increases to 10% for taxpayers up to age 65. For taxpayers 65 and older the rate increases to 10% in 2017.

5. Excise Tax on Medical Devices – Tax of 2.3% on the sale of medical equipment by a manufacturer, producer or importer.

Key Tax Provisions – 2014

1. Large employers will be required to provide affordable health care – Large employers (50 or more full-time equivalent employees) that don’t provide any insurance or don’t provide affordable health care to employees will be assessed a penalty of $2,000 per employee over 30 employees. Employers can also be assessed a penalty if they offer insurance, but employee obtains insurance on a state exchange and there is a tax credit or cost-sharing reduction allowed. Penalty in that instance is $3,000 for those employees on exchange. Any penalties paid are not deductible by employers.

2. Individuals are required to maintain health insurance – The majority of individuals will be required to obtain insurance either through employer or through state exchanges. If individuals do not maintain coverage, they’ll be assessed a surtax on their income tax return. The surtax will be phased in from 2014 – 2016, with the maximum surtax of $695 for a single taxpayer or $2,085 for family of three or more.

Key provisions – 2018

1. Excise tax on Cadillac Plans – For high cost employer sponsored and self-insured plans, there will be a 40% excise tax assessed.

Planning Opportunities

1. For business owners, if wages are above threshold amounts, begin to consider reducing wages below threshold amount and increase S Corp distributions. Important note here is that compensation must be considered reasonable.

2. Partnerships and LLCs with active (vs. passive) members should consider making an S election so that earned income could be reduced – currently income for active members from S corps is not subject to the investment tax (salaries must be reasonable).

3. Maximize deferrals into retirement accounts, which lowers the current income; future distributions would not be subject to the Medicare/investment income tax.

4. Unless Bush tax cuts are extended, capital gains and dividend rates will increase in 2013. With the rate increases and the additional new Medicare/Investment taxes, individuals may want to consider harvesting capital gains in 2012.

5. FSA (flexible spending arrangements) need to be amended for the $2,500 limit.