Health Care Reform Tax Implications

Although health care “reform” has been passed, there is still considerable debate that rambles on (makes a little Led Zeppelin run through my mind! “And to our health we drank a thousand times, it's time to ramble on.”). Rumors float around, often based on party lines and party objectives. While I do indeed have my opinions on the health care situation, there are tax facts that are simply facts, regardless of my political leanings. As a result of one of the rumors spreading like wildfire, I’ve decided to make today’s topic about health care reform.


Just the facts:

• There are a number of aspects in what has passed as health care reform. First, I’ll address the rapidly spreading rumor. 
• Part of the bill the bill that passed: TITLE IX REVENUE PROVISIONS- SUBTITLE A: REVENUE OFFSET PROVISIONS-(sec .9001 , as modified by sec. 10901) Sec.9002. "requires employers to include in the W-2 form of each employee the aggregate cost of applicable employer sponsored group health coverage that is excludable from the employees gross income."
• This would be the rumor going around: “Starting in 2011—next year—the W-2 tax form sent by your employer will be increased to show the value of whatever health insurance you are provided. It doesn't matter if you're retired; your gross income WILL go up by the amount of insurance your employer paid for. So you’ll be required to pay taxes on a larger sum of money that you actually received; take the tax form you just finished and see what $15,000.00 or $20,000.00 additional gross income does to your tax debt. That's what you'll pay next year. For many it puts you into a much higher bracket. This is how the government is going to buy insurance for fifteen (15) percent that don't have insurance and it's only part of the tax increases, but it's not really a "tax increase" as such, it a redefinition of your taxable income.”
• Providing this information on a W-2 gives the IRS the ability to cross reference claims for health insurance credits (which will be addressed later) claimed by employers. By putting it on an employee’s W-2, it will have a tendency to make employers honest. Many employees would question an entry for health insurance premiums on their W-2 if they did not receive the benefit. 
• Beginning in 2011, you can no longer receive reimbursements for over-the-counter medications from your health savings accounts, flexible spending accounts or health reimbursement arrangements. Given the number of medications that are now available OTC, this is probably the hidden little gem that will have a large impact on your pocketbook.
• In 2013, if you itemize, the floor for medical expenses will jump to 10% from 7.5%. Individuals 65 and over will not be affected until 2016. I’ll be interested to see how a married couple is to handle the circumstances if one of them robbed the cradle! 
• Also beginning in 2011, the penalty for nonqualified distributions from health savings will double to 20%. That’s just the penalty. You will still have to pay income tax at your applicable rate on the distribution.
• Beginning in 2013, there will be a Medicare tax of 3.8% on INVESTMENT income of high income individuals. It will apply to the lesser of an individual’s unearned income or the amount their adjusted gross income exceeds threshold amounts ($200,000 for single or $250,000 for married filing joint).
• Another whopper in 2013; for taxpayers having wages in excess of $200,000 for single or $250,000 for married filing joint, there will be a 0.9% Medicare surtax applied to those excess wages.
• For you tanning bed worshippers, there is NOW an excise tax of 10% on indoor tanning services. This went into effect July 1, 2010.
• Also beginning in 2013, there will be a substantial drop in the amount employees can contribute to their health care flexible spending account – from an employer decided limit down to $2,500. If there has been some major surgery you’ve been putting off, I would plan for it before 2013 begins and utilize the FSA as best you can!
• In 2014 we have a refundable tax credit available to assist low income taxpayers with the purchase of health care coverage. The credit will phase out completely at $44,000 for single and $88,000 for married filing joint. 
• In 2010, there is a credit of up to 35% of health insurance premium costs available to small companies with 10 or fewer employees with average annual wages of less than $25,000. It is completely phased out if a company has more than 25 employees and the average annual wage is above $50,000. In 2014, things change!!! Each state will be required to provide a marketplace, Small Business Health Options Programs (SHOPS), where small businesses, self-employed taxpayers and individuals can purchase coverage. Small businesses that participate will be eligible for a credit of up to 50% of the costs (has the same phase outs). The opportunity for the credit ends after 2015.
• The “Individual Mandate” goes into effect in 2014. Individuals that do not acquire adequate health insurance coverage by 2014 will be subject to a tax that is the greater of $95 or 1% of adjusted gross income. In 2016, that rises to the greater of $265 or 2.5% of adjusted gross income.
• The whopper of 2014; the “Employer Mandate”. There will be a non-deductible fee imposed on business with 50 or more employees and the company does not offer the option of adequate coverage. The fee???? $2,000 per employee (although the first 30 employees do not figure into the fee calculation).

There is much, much more to the health care reform, but this is probably more than enough to digest at one sitting. Keep an eye out for the sequel!

“Mine's a tale that can't be told, my freedom I hold dear.”

What to Watch for with Business Auto Expenses….. Mileage or Actual Expenses?

The other day, I was having a casual conversation with someone who was repeating “expert advice” they had read on-line regarding business related auto expenses. I was certain they had interpreted said “expert advice” incorrectly. I informed them of the proper rules, but thought I should check what is indeed out there on-line from these “experts”. The information available on numerous sites (do they just copy each other?) was erroneous, hence today’s blog topic was born.


By far, the most common misinformation out there is regarding what is allowed the first year you claim auto expenses for a particular vehicle in your business. Many claim that you MUST claim actual expenses the first year of business use of a vehicle. This cannot be further from the truth (except when you have more than four vehicles, then do must use actual expenses). As a matter of fact, using actual expenses your initial year means you have to use actual expenses on the vehicle for the rest of time you own that vehicle!!!!

You DO have a choice (with 4 or less vehicles) between actual expenses and standard mileage, and that choice needs to be made the first year. If you choose actual expenses, you are married to that for the life of the vehicle. This may be the best option if you won’t have the vehicle beyond a few years. It enables you to take accelerated depreciation (Section 179 or bonus depreciation) in addition to the costs of running and maintaining that vehicle. One caveat, if you sell the vehicle, you may be subject to some recapture of that accelerated depreciation, which creates taxable income. If you trade-in the vehicle, the accelerated depreciation transfers to the new vehicle (you cannot take it again on the new vehicle with the trade-in), and that recapture gets deferred until you sell the new vehicle.

If you will have the vehicle for a number of years, standard mileage will usually be the better option for the long run. You may end up taking mileage expenses beyond the actual cost of the vehicle. If you choose standard mileage, you have the option of changing to actual expenses at a later date. Depreciation needs to be calculated for prior years in which standard mileage was taken, using straight-line depreciation to determine the remaining useful life of the vehicle. Items such as tolls and parking may be deducted in addition to the standard mileage.

The best thing to do for record keeping purposes is to keep some sort of log book in your car (if you use your cell phone, but sure to sync it with your computer in case you lose your phone!) and record the following information each time you drive the car for business reasons:

                                       • Date
                                       • Beginning odometer reading
                                       • Ending odometer reading
                                       • Business purpose
                                       • Place visited

Remember to check with a qualified tax advisor, discuss your future plans and determine the right choice for your business.

*A little known fact about mileage: generally miles commuting to work are NOT deductible, but if you have a second job, those commuting miles are deductible. This would be claimed on Form 2106 and Schedule A. If you don’t itemize (file a Schedule A), then it probably will not be of value to you.