Tuesday, August 21, 2012


The Supreme Court recently upheld most of the Patient Protection and Affordable Care Act (PPACA), aka “Obamacare”, and the idiots in Congress have been unsuccessful in 30+ attempts to repeal the Act.  So it looks like we better prepare ourselves for the provisions that will become effective in 2013.

·      Currently you will only receive a tax benefit for your medical expenses if you itemize on Schedule A and the total of your allowable expenses exceeds 7½% of your Adjusted Gross Income (AGI).  If your expenses total $6,500 and your AGI is $80,000 your deduction is $500 ($80,000 x 7½% = $6,000 / $6,500 - $6,000 = $500).

Beginning with 2013, the exclusion rises to 10% of AGI.  In the above example there would be no deduction, as 10% of $80,000 = $8,000, and $6,500 - $8,000 = 0. 

Under the dreaded Alternative Minimum Tax medical expenses are only deductible to the extent they exceed 10% of AGI.

In reality, the allowable medical expenses of most taxpayers do not exceed the current 7½% exclusion – so, unfortunately, the change will only affect those with excessive medical expenses and, in my client base, retired seniors with lower AGIs.

·      There is currently no statutory limit on the amount that employers can permit employees to contribute to a medical expense Flexible Spending Account (FSA).  The limitation is set by the individual plan.

Beginning with 2013, employee contributions to an employer-provided medical expense FSA is limited to $2,500 per year.  This amount will be indexed annually for inflation.

Having medical expenses paid through an FSA is a way of getting a tax deduction for medical expenses “above-the-line” that were not allowed on Schedule A due to the AGI exclusion.  I have often seen as much as $5,000 in FSA contributions for my clients – so this change will increase these taxpayers’ liability by $600-$700.

  Employees and employers split the cost of Social Security and Medicare tax (FICA) – each pays 6.2% of taxable wages for Social Security and 1.45% for Medicare (although for 2012 the employee pays only 4.2% of his/her taxable wages).  There is a limit on the amount of taxable wages subject to the Social Security portion, but the Medicare tax is applied to all taxable wages.  Taxable wages for FICA may be different that taxable wages for income tax.

Self-employed taxpayers pay both halves of the FICA tax as “self-employment tax”, again with a 2% reduction in the Social Security component for 2012.  They are allowed an “above-the-line” deduction for a portion of the self-employment tax assessment.

Beginning in 2013, the employee’s share of the Medicare tax increases by 0.9% - to 2.35% - for taxable wages over $200,000 ($250,000 for joint filers and $125,000 for married couples filing separately).  The self-employment tax is similarly increased on these levels of income.   

  Beginning in 2013, a new tax is added on the Form 1040 for taxpayers with “modified” AGI (MAGI) over $200,000 (again $250,000 for joint filers and $125,000 for married couples filing separately.  These taxpayers will be subject to a 3.8% “surtax” on “net investment income”.

Net investment income is taxable interest, dividends, capital gains, annuities, royalties, rents, and pass-through income from a passive S-corporations and partnership, less related investment expense deduction.  Modified AGI is regular AGI with any foreign earned income exclusion or foreign housing exclusion added back.

This change is the source of the nonsense email that has been circulating for the past year that there is a federal “sales tax” on the profit from the sale of your personal residence.  See my post “WTF?”.


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