What We Know | Tax Tip of the Week | No. 181

What Changes, and Doesn't, Change on Health Care Expenses

How exactly does one account for the taxes on health care expenses? Forbes.com blogger Kelly Phillips Erb explains where ObamaCare does and does not change the tax treatment.  This is part one of a two part Tax Tip on the changes in health care. It’s been two and a half years, one Supreme Court decision and two national elections since President Barack Obama signed the Patient Protection & Affordable Care Act (a.k.a. ObamaCare). Yet the tax treatment of health care expenses–and the way the law does or doesn't change it–continues to befuddle taxpayers. And understandably so. Here’s a primer. THE PHANTOM CADILLAC TAXIf you get health insurance from an employer with more than 250 workers, the Form W-2 issued in the next couple of weeks reporting your 2012 compensation to you and the Internal Revenue Service will include the value of health insurance premiums paid by your employer. (Smaller employers must start reporting the number on 2013 W-2s). Don’t panic. The benefits shown aren't taxable to you. Beginning in 2018, however, “Cadillac” health insurance plans–generally those costing more than $10,200 a year for individuals or $27,500 for families–will be subject to a 40% tax on premiums. The tax won’t be levied directly on individuals but on insurance providers who will likely pass it along in the form of even higher premiums. The point is to make these plans, which often have few cost-control features, unattractive.As for ObamaCare’s controversial penalty/tax on those who don’t have health insurance, don’t look for it on the 2012 tax forms. The “individual mandate” doesn't kick in until 2014. A new tax credit to help lower-income folks pay for coverage purchased through new health insurance exchanges also doesn't take effect until 2014.DEDUCTION REDUCTIONSWrite-offs for medical expenses are being trimmed for some taxpayers. For 2012 (the tax return due this coming April), if you itemize deductions on Schedule A of a 1040, you can deduct eligible medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI). But to help pay for ObamaCare, beginning in 2013 taxpayers younger than 65 will be able to deduct these expenses only to the extent they exceed 10% of AGI. So, for example, a taxpayer with an AGI of $100,000 and $10,500 of medical expenses could claim a $3,000 deduction in 2012 but only $500 in 2013.Those 65 and older before the end of 2013 keep the 7.5% threshold through 2016–assuming there aren't more changes before then as part of a deficit reduction or tax reform deal. So what’s an eligible medical expense? Generally, amounts you pay out of pocket (without reimbursement from an insurance company or employer) for yourself and your dependents for dental and medical care (including prescription drugs, medical equipment and the cost of getting to and from treatment); for nursing home bills; and for long-term care and health insurance, including Medicare premiums. (See IRS Publication 502 for more details).Self-employed taxpayers can often save more by writing off health insurance premiums as a business expense–they’re deductible only to the extent your business has a profit. In May the IRS made clear that Medicare premiums, too, qualify for that write-off if you are self employed. More on this topic next week….. 

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