(Victor Valley)–Billions of dollars in new taxes went into effect on January 1, 2013 to fund provisions in the health care law passed in 2010.
The new taxes include an increase in the payroll tax on wages, a tax on investment income (including interest, dividends and capital gains) and a new tax on medical devices.
Higher Medicare Tax
Currently, a 2.9% Medicare payroll tax (1.45% from employees and 1.45% from employers) is the primary financing source for Medicare’s hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled.
Self-employed people pay the entire 2.9%, but are permitted to deduct half the amount for income tax purposes.
Starting January 1, 2013, single taxpayers earning more than $200,000 and married couples earning more than $250,000 will be taxed an additional 0.9% (2.35% total) for earnings over that base amount.
A questions-and-answers document available from the Internal Revenue Service (IRS) notes that an employer must withhold the additional Medicare taxes from wages paid in excess of $200,000 in a calendar year without regard to the individual’s filing status or wages paid by another employer.
The document recommends an individual make estimated tax payments and/or ask that additional income tax be withheld if he/she anticipates additional liability due to the new Medicare tax. If the taxpayer anticipates not meeting the tax threshold for joint filers, that individual cannot ask the employer to stop withholding the additional Medicare tax, according to the IRS document.
The document advises the individual to claim credit for any withheld additional Medicare tax on his/her income tax return.
New Tax on Investments
The new tax on investment income also is to support Medicare. That 3.8% tax will be imposed on the lesser of the individual’s net investment income or the amount by which the individual’s modified adjusted gross income (AGI) tops $200,000 (single) or $250,000 (married filing jointly).
Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities or that trade in financial instruments and commodities, and net gains from the disposition of property held in a trade or business that is a passive activity or that trades in financial instruments and commodities.
Excluded from investment income are distributions from qualified retirement plans and any items taken into account for self-employment tax purposes.
New Tax on Medical Devices
A new 2.3% tax will be levied on the gross sales of medical devices intended for use in a medical institution or by a medical professional. The law included an exception from the tax for retail items purchased by the general public (not medical professionals) for individual use, such as eyeglasses, contact lenses and hearing aids.
The final IRS regulations include a series of examples to illustrate how a device might qualify for the retail sale exemption.
Other changes due to the health care law that will affect taxes:
Medical expenses deduction raised from 7.5% of AGI to 10%. Taxpayers currently can take an itemized deduction for unreimbursed medical expenses that exceed 7.5% of AGI. The floor is raised to 10% starting January 1, 2013.
New limit on health care flexible spending plans. There had been no limit to the amount of contributions to a flexible spending arrangement (FSA), which allows an employee to set aside a portion of earnings to pay for qualified expenses as established in a cafeteria plan. Allowable contributions to health FSAs are capped at $2,500 per year starting January 1, 2013. The dollar amount will be indexed to inflation after 2013.