What are some of the tax implications of the health care law for individual taxpayers?

Beginning January 1, 2013, four provisions of the Affordable Care Act go into effect that will negatively impact individual taxpayers. Here’s what you can expect:

  1. The employee portion of the Medicare tax will increase by 0.9% on wages and self employment income in excess of $200,000 ($250,000 for married, filing jointly; $125,000 for married, filing separately).
  2. Taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for married filing joint and surviving spouses; $125,000 for married filing separate) will be subject to a 3.8% tax on the lesser of net investment income or MAGI over the previously mentioned thresholds. Net investment income subject to this surtax includes taxable interest, dividends, annuity income, passive income, and rents.
  3. The threshold over which medical expenses can be deducted will increase from 7.5% to 10% of adjusted gross income (AGI).
  4. Employee salary reduction contributions to health Flexible Spending Accounts (FSAs) maintained under a cafeteria plan are limited to no more than $2,500 per year.

The above provisions of the Affordable Care Act aim to increase taxes paid and decrease allowable deductions. Possible planning points to consider before the end of 2012 include accelerating income into 2012, if possible, and reviewing your investment strategy with your advisor to invest more heavily in tax exempt bonds.