Healthcare Reform Act: Are You Prepared?

The Patient Protection and Affordable Care Act, known by many other names, has withstood several challenges from numerous fronts but has managed to stay intact.  While sections of the Act have already been implemented, some have yet to go into effect.  However, taxpayers of all types need to prepare now for those that will be in effect as far out as 2014.

Even though not all details have been sorted out, there are three main components of the Act to be aware of: 1) All taxpayers will be required to obtain basic health coverage or pay a penalty beginning in 2014 (the “individual mandate”); 2) Employers with 50 or more full-time equivalent employees must provide minimum value, affordable coverage or pay a tax, now beginning in 2015 (the “play-or-pay” requirement); and 3) State insurance exchanges will be set up by the states or federal government to provide a source for individual and small business coverage, with enrollment expected to start in Fall 2013.

The Treasury Department announced on July 2^nd that enforcement of the play-or-pay requirement will be delayed until 2015, one year later than originally planned.  Formal guidance from the Treasury Department is expected soon, but they still strongly encourage compliance in 2014.  This announcement has certainly given the affected employers some room to breathe, although many experts recommend that large employers still ensure their plan meets the minimum value and affordability parameters by the start of 2014.  The Treasury also expressly mentioned in its July 2^nd announcement that the play-or-pay delay does not affect employee access to the premium tax credits.

The delay in enforcement of the play-or-pay requirement does not currently affect the other two key components of the Act, namely the setup of the insurance exchanges and the individual mandate.  The focus has now turned to the exchanges, for which the Obama administration has set October 1^st as the date when individuals who are not otherwise covered can begin shopping for health insurance.  There are two key parts of the law that also drive increased coverage, namely 1) the expansion of Medicaid coverage to low-income individuals, and 2) subsidizing the health insurance payments through a premium tax credit.  The Medicaid expansion has met some serious challenges; however, as more than half of the states have rejected it or are undecided about implementing it on a state-level.  The result is more than 9.7 million uninsured low-income individuals without coverage. 

The individual mandate is still in place starting in 2014, but obviously there is interplay between this rule and the exchange setup.  While it is true that 95 percent of employers already provide health benefits, the remaining 5 percent account for countless jobs and the employees who will be affected by the exchanges and the individual mandate. 

As we have recently joined together in celebrating the birth of our country, Americans will continue keep watchful eyes on the progress of the Affordable Care Act affecting each of us.  The regulations on the now-delayed employer play-or-pay requirement will be released shortly.  The date the state exchanges are expected to be in place is less than 3 months away, and the Obama administration will likely do whatever it can not to have to push back the date.  There is also discussion regarding changing the definition of a “full-time” employee to the commonly-accepted 40 hours per week instead of the 30 hours written into the law.  Such a change could go a long way to help minimize employer reduction in employee hours to meet the play-or-pay requirement.

This blog will continue to update and analyze major events concerning the Affordable Care Act as they are made available.      

-Steven C. Levy

Steve Levy is a Tax Manager at Donovan CPAs and Advisors.  He can be reached at slevy@cpadonovan.com or (317) 745-6411

www.cpadonovan.com

Investment Income and Wages

2013 Tax Increases on Investment Income and Wages

After a multitude of negotiations took place in Washington to avert a “fiscal cliff”, one certainty for 2013 is that there is a tax increase on investment income and wages for those income earners above a certain threshold.  The income thresholds are $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately, and $200,000 for other filers.  Therefore, it will be imperative to engage in planning to keep income below these levels.  Some taxpayers and employers delayed in preparing for the new tax increases, waiting to see if the U.S. Supreme Court would uphold the 2010 health care legislation and/or if the GOP would win the White House.  However, with the Supreme Court upholding the legislation and President Obama’s re-election, it appears these tax increases will remain in place.

Taxpayers whose income will be above the amounts mentioned should become familiar with how the new tax increases will take effect.  Luckily, the IRS recently released guidance on the matter (I apologize in advance for the technical language to follow, but it does get quite complex)  Starting in 2013, a 3.8% Net Investment Income Tax (NIIT) will be imposed on the lesser of “net investment income” or the excess adjusted gross income (AGI) over the threshold amount.  At the heart of this tax is the definition of net investment income.  According to the rules and guidance, it consists of gross income from interest, dividends, annuities, royalties, rents, passive activity income, and gains on disposition of passive property less deductions allocable to the gross income or gain.  Net investment income does not include self-employment income or distributions from a qualified plan.  Please note that the 3.8% tax also applies to trusts and estates. 

Also effective in 2013 is the 0.9% Additional Medicare Tax on an employee’s share of Medicare tax on wages and compensation, as well as on self-employment income, that in total exceeds the threshold amounts mentioned above.  For this tax, instead of using AGI, the income thresholds only include wages, compensation, and self-employment income.  In addition, there is no “employer match” for the Additional Medicare Tax.  An employer is required to collect Additional Medicare Tax with respect to wages earned only to the extent an employer pays wages to employee in excess of $200,000.  Employees who expect to pay Additional Medicare tax but earn $200,000 or less from one employer may not request withholding of the Additional Medicare Tax from that employer but can instead ask for additional income tax withholding.  Those that did not request additional withholding, and the self-employed, may need to make estimated tax payments.  Finally, individuals will report Additional Medicare Tax and pay any shortfall on their Form 1040.

With proper planning it may be possible to keep income levels below the threshold that triggers the additional tax.  One such year-end planning technique may involve accelerating income that is otherwise subject to one or both of the new taxes.  If AGI cannot be lowered below the trigger levels, additional investment strategies and planning can be utilized to keep investment income at a minimum.  While 2013 indeed ushers in a level of uncertainty in many respects, there are definitive actions you can take to minimize your tax bite from the government.  Your CPA or other advisor can assist with these tax saving strategies.

Steve Levy is a Tax Manager at Donovan CPAs and Advisors.  He can be reached at slevy@cpadonovan.com or (317) 745-6411.

www.cpadonovan.com

Tax Uncertainty

The Latest from Washington

As Congress returns for the coming session, quite a bit is on the table for them to consider in the tax area.  There have already been discussions with the President and Congressional leaders to avert the “fiscal cliff”.  As many have heard, the main issues on the table are the expiring provisions of relatively low tax rates on ordinary income and capital gains.  However, there are several other issues, including business expensing incentives and tax breaks for individuals.

As has been in the news, one side wants to raise the rates for those earning over $250,000, while the other wants to keep rates as they are but would consider reducing deductions.  In the end, negotiations will take place and compromises will be made that may involve not only tax matters but also spending cuts.

One interesting point in all of this is that even if nothing is done by the end of the year, the Treasury department may have the ability to freeze the withholding rates on wages.  As background, the employee-share FICA tax withholding rate on employee wages has remained at 4.2% (as opposed to the 6.2% the employer pays on the same wages.)  To avoid the increase of this rate by 2% scheduled to occur at the start of the year, the Treasury may have a withholding rate freeze at its disposal, thus reducing some of the potential financial impact on employees.

While attention is largely paid to the “fiscal cliff”, a more impending result of Congressional inaction may occur if the Alternative Minimum Tax (AMT) exemption patch is not enacted.  For 2011, the AMT exemption amount was $48,450 for single taxpayers and $74,450 for married taxpayers filing jointly.  Without a similar exemption amount put in place for 2012, an additional 28 million taxpayers will be subject to this extra tax.  The IRS followed the assumption with the 2013 filing system that the patch would be in place for 2012.  If that changes, and a patch is not put in place by the end of the year, the IRS themselves say over 60 million taxpayers may not be able to file their tax return until late March 2013.  Hopefully those in Congress are heeding IRS warnings.

Other Tax Items of Note

-          The IRS has issued the standard mileage rates for the use of a vehicle in 2013.  For the business use of a car, van, pickup truck, or panel truck, the 2013 rate will be 56.5 cents per mile (up 1 cent from 2012.)  Driving for medical and moving purposes may be deducted at 24 cents per mile (also 1 cent higher).  Finally, the rate for service to a charitable organization remains at 14 cents per mile.

-    The IRS delayed the effective date of tangible property regulations until 2014.  These regulations govern whether tangible property expenses can be deducted or need to be capitalized, and largely lean in favor of capitalizing expenses. 

Written by Steve Levy, CPA, JD
www.cpadonovan.com