July 04 , 2010 - I've heard that the Health Care Act has a lot of tax changes and penalties if I don't have insurance. How am I affected?

The new law makes it mandatory for all U.S. citizens and legal residents to have qualifying health insurance. Those who are not covered for a period of three months or more will have to pay a penalty in the amount of the greater of $695 per year per person (up to three people), or 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in from 2014 to 2016, after which it will be adjusted each year for inflation. Exemptions will be granted for financial hardship, religious objections, American Indians, illegal aliens, and incarcerated individuals.

Tax Credits For tax years after 2013, a refundable tax credit, the "premium assistance credit," will be available for eligible taxpayers (incomes up to 400% of the federal poverty level) who purchase health insurance through an Exchange. This credit is based on income and is paid directly to the insurer to assist the taxpayer in purchasing the health insurance plan. The taxpayer pays the difference between the amount of the credit and the premium for the plan. For employed individuals, this payment may be made through a payroll deduction.

Tax Increases In order to pay for the Health Care Reconciliation Act, the Act increases certain tax rates.

• Medicare, which is currently 1.45% for employee and employer (or 2.9% for self-employed individuals), will be raised to 1.9% for each for individuals earning more than $200,000 and married couples earning more than $250,000 beginning in 2013.
• Additionally, Medicare, which currently only taxes payroll, will be extended to apply to investment income. The tax, beginning in 2013, will be 3.8% for single taxpayers with adjusted gross income (AGI) over $200,000 and joint filers over $250,000. Net investment income is interest, dividends, royalties, rents, and gain from the sale of property (other than property held in a business). It also includes net income from a passive business activity. However the new tax doesn't apply to retirement income.
• A 10% excise tax (similar to a sales tax) will be imposed on indoor tanning services, effective July 1, 2010.
• The floor on medical expenses deduction on Schedule A of the Federal Form 1040 will be raised from 7.5% of AGI to 10% of AGI effective for tax years beginning after Dec. 31, 2012 for individuals younger than 65.

HSAs, FSAs, and MSAs Several changes will be made to health savings accounts (HSAs), flexible spending arrangements (FSAs), and Archer Medical Savings Accounts (MSAs).

• Over-the-counter drugs not prescribed by a doctor will no longer be reimbursable through a health reimbursement account (HRA) or FSA, or tax-free through an HSA or MSA effective for tax years beginning after December 31, 2010.
• Penalties for nonqualified distributions from HSAs and MSAs will be increased to 20% from 10% and 15% respectively for the disbursed amount, effective for distributions after December 31, 2010.
• FSAs, which currently are not limited in the amount which an employee may set aside to pay for qualified expenses will be limited to $2,500 per year effective for tax years beginning after December 31, 2012 and to be adjusted for inflation after 2013.

Dependent Coverage in Employer Health Plans, Adoption Credits and Adoption Assistance Changes

• Effective March 30, 2010, the general exclusion for reimbursements for medical care expenses under employer-provided accident or health plans is extended to any child of the employee who is under age 27 as of the end of the tax year. Self-employed individuals may also take a deduction for the health insurance costs of their child of that same age.
• For tax years beginning after December 31, 2009, the now refundable adoption tax credit is increased by $1,000 and extended through 2011.
• The adoption exclusion is increased by $1,000.

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