The Patient Protection and Affordable Care Act reforms health care

The recently signed health care legislation has an official name, but you probably think of it simply as health care reform. And now that it's law, you may be wondering what tax changes are in store.

Here's a recap of some rules included in the two health care bills that will affect your individual and business tax returns.

• Business tax credit. Starting this year, a new federal tax credit is available when you provide health care insurance for qualified workers. In general, the credit applies when you have no more than 25 employees earning average wages of $50,000 or less. The maximum credit is 35% of the premiums you pay.

• Adoption credit. For 2010, you'll be able to claim an increased adoption credit on your personal return. The credit is increased by $1,000 (to $13,170) and is refundable. Also, the credit is extended through 2011.

• Changes to health savings plans. In 2011, over-the-counter medications will no longer be considered qualified medical expenses for health savings plans such as HSAs, FSAs, and HRAs. Also, penalties for nonqualified withdrawals will increase.
  
  The maximum contribution you can make to FSAs will be limited to $2,500 starting in 2013.

• Increased Medicare tax. A two-part change affects individual tax returns in 2013.
  
  If you're married, filing jointly, and have income of more than $250,000 ($200,000 when you're single), a 3.8% Medicare tax may be assessed on your unearned income. Unearned income includes dividends, interest, royalties and rents.
  
  In addition, when your earned income is greater than $250,000 (for married filing jointly) a .9% increase in Medicare tax will apply. The income threshold is $200,000 when you're single.

• Modification of medical expense itemized deduction. Starting in 2013, in order to claim an itemized deduction on your personal return when you're under age 65, your unreimbursed medical expenses will need to exceed 10% of your adjusted gross income. The current threshold is 7.5%.

• Penalties for not providing health care to employees. A penalty for failure to provide minimum essential health coverage to your employees takes effect in 2014. The penalty applies when you have 50 or more full time employees.

We'll be providing more information on these and other tax provisions in the health care reform legislation. In the meantime, if you have any questions about how the bill applies to you or your business, please call.

For more information, contact Ross Rizzo at 212-404-5528, rrizzo@sb-cpa.com.

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