Health Care Reform Individual Requirements

The following is a brief overview of the key tax changes affecting individuals in the recently enacted 2010 Health Reform Legislation. Please call our offices for details of how the new changes may affect your specific situation.

Individual mandate.The new law contains an “individual mandate”—a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty after 2013. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing (2010 threshold for taxpayers under age 65 - $9,530 Single; $18,700 Married). The penalty will be phased-in over a 3-year period beginning in 2014. Exemptions will be granted for individuals meeting certain criteria.

Premium assistance tax credits for purchasing health insurance.The health care legislation provides tax credits to low and middle income individuals and families for the purchase of health insurance. Specifically, for tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an Exchange. The premium assistance credit, which is either refundable or payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange.

Higher Medicare payroll tax on wages.Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker's wages without limit. Under the provisions of the new law, which take effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning wages more than $200,000 and married couples earning combined wages more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts.

Medicare payroll tax extended to investments.Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000. Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business).