by Jennifer Anderson

Many of the provisions of the health care reform act have already taken effect and there are a few more on the horizon for 2014.  As the new year approaches, these provisions raise many questions and pose a potential for substantial penalties.

Increased Medicare Taxes on Wages for Higher-Earning Employees and Self-Employed Workers
Beginning this year, many taxpayers will see an increase in their Medicare taxes. This increase is attributable to the new 0.9% increase Medicare tax imposed on wages in excess of $200,000 for single-filers and $250,000 for married taxpayers.  The 0.9% tax will be added to the employee’s existing share of the Medicare tax of 1.45%.

3.8% Surtax on Unearned Income for High-Income Taxpayers
Another tax being imposed on high-income taxpayers (individuals, estates, and trusts) is the additional Medicare tax on unearned income. The tax applies on net investment income when the taxpayer’s income exceeds their threshold amounts. For 2013, the thresholds for married filing joint and surviving spouses are $250,000, $125,000 for married filing separately, and $200,000 for all other individuals. Thankfully, some relief is available!  The surtax is not imposed on interest from tax-exempt bonds, veterans’ benefits, retirement benefits and investment income from an active trade or business.  These exclusions pose many planning opportunities to minimize the sting from this new tax!  You may want to consider reviewing your Form W-4 at this time to determine if your federal income tax withholding is adequate.

10% Threshold for Deductible Medical Expenses
Beginning this year, medical expenses must exceed 10% of AGI for taxpayers under the age of 65 before they receive any tax benefit.  This threshold increased from the existing somewhat unobtainable 7.5% AGI hurdle.  Those who owe the alternative minimum tax are already subject to the 10% threshold.  Consider fully participating in a HSA or cafeteria plan to meet these expenses with pre-tax dollars.

2014: Penalty for Lack of Health Insurance
In 2014, individuals and businesses alike may face penalties for lack of health insurance. Individuals that do not maintain minimum essential coverage are subject to a penalty. Large employers, companies with 50 or more full time equivalent employees, failing to offer affordable health insurance plans to their employees face a penalty of $2,000 for each full time employee over a 30-employee threshold.

The IRS recently announced that the penalty imposed on large employers will be delayed until 2015. However, the IRS is encouraging employers to voluntarily comply with the requirement in 2014.  Unfortunately, individuals do not get a reprieve from penalties in 2014 and must comply with the requirements.  Both employers and employees need to act now to ensure they meet the minimum requirements for insurance coverage to reduce exposure to penalties before the new rules take effect beginning in 2014.

These are just some of the key provisions going into effect in the next 18 months that may impact you. When health care reform was initially passed in 2010, many of the provisions seemed distant, with changes gradually going into effect up to 2018.  As a result, many taxpayers have delayed strategic planning -  Now is the time to act!