NEW YORK - The big changes made by the 2010 health care law kick in in 2014, but there’s still time left in 2013 to prepare for them,” says Harris Abrams, Esq., a senior tax analyst at Thomson Reuters.
“The 2010 Affordable Care Act and other recent tax law changes significantly affect the tax consequences of your healthcare decisions,” Abrams notes. “Odd as it may seem, you’d be well-advised to discuss your healthcare choices with your personal tax adviser as well as with your doctor.”
Up-to-date analyses of legislation and regulations, authored by Abrams and hundreds of other experts, are available to tax and accounting professionals on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
Abrams advises taxpayers to consider the following recent tax law changes when making healthcare decisions:
- There is a higher threshold for deducting medical expenses . Before 2013, you could deduct unreimbursed medical expenses that exceeded 7.5% of your adjusted gross income (AGI). Now, if you are under age 65 (as of Dec. 31, 2013), you can deduct only those medical expenses that exceed 10% of your AGI. But for taxpayers or their spouses who are 65 or older, this 10% threshold will not apply until 2017.
However, you can still get a tax benefit from your medical expenses if you can bunch them together in one year. As an example, you have AGI of $50,000 and, at some point, you will need to have a $4,000 cataract procedure and a $5,000 hip replacement. If you have the cataract procedure this year and the hip replacement next year, you will not be able to deduct any of your expenses, because neither procedure costs more than 10% of your AGI (which is $5,000). If you can put off the cataract procedure until next year, or move the hip replacement up to this year, you will have a total of $9,000 in unreimbursed medical expenses in one year. The excess of that over $5,000 (which is 10% of your $50,000 AGI) can then be deducted.
- You can count an adult dependent’s medical expenses as your own for purposes of the itemized deduction . If you pay the medical expenses of an adult dependent (a parent, grandparent, or adult child who gets more than half of their financial support from you), you can add those expenses to your own to determine if you exceed the 10%-of-AGI threshold. So, in the example above, if you have a $4,000 cataract procedure and your parent whose financial support you provide has a pacemaker put in at a cost of $5,000, you can add both of those expenses together and deduct the excess over 10% of your AGI.
- You may have to buy health insurance . Beginning in 2014, if you do not maintain minimum essential health coverage, you will be hit with a penalty. You can avoid the penalty by buying an individual insurance policy or by being covered by an employer plan, a government plan (such as Medicare, Medicaid, or the Children’s Health Insurance Program), or certain grandfathered group health plans. Some lower-income individuals may be exempt from this requirement, and you may qualify for a refundable tax credit (a credit you can get even if it exceeds your tax liability) if you get coverage through a health insurance Exchange established by your state.
- Your Flexible Spending Account (FSA) contributions cannot exceed $2,500. Before 2013, the government did not limit the amount of money you could contribute to an FSA (although some plans did). Beginning in 2013, FSA contributions are limited to $2,500 a year—and this is a per-employee limit. That means your FSA contribution is limited to $2,500 whether you are single or married, and no matter how many children you have. Remember that FSA contributions are a use-it-or-lose-it proposition. So, if you are getting near the end of the year and still have money left in your FSA, consider moving any anticipated medical expenses from next year to this year. Otherwise, that money is lost.
The rules governing who must get health care insurance, how much insurance you have to get, and what exemptions and tax credits are available to ease the burdens of these rules, are complicated. Taxpayers should consult with a personal tax adviser before applying these or other tax strategies.
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