The U.S. Supreme Court’s landmark decision in late June upholding the individual mandate in the Patient Protection and Affordable Care Act means that a number of federal tax-law changes scheduled for 2013 will go into effect. Be prepared! Whether you have health coverage through an employer or pay for it yourself, you’re likely to be shouldering an ever-greater portion of the cost of healthcare yourself ... without any tax relief from Uncle Sam.
Increased out-of-pocket costs. It’s axiomatic that the way to lower the cost of premiums is to raise co-payments and insurance deductibles. In other words, the more you’re willing to pay for medical costs, the less you (and/or your employer) will be charged for health insurance. It is likely that as you (or your employer) review the coverage options for 2013, co-payments and deductibles will be increased in order to keep a lid on premiums.
Lower FSA contributions. Employees who work for companies that offer flexible spending accounts (FSAs) can cover out-of-pocket medical costs on a pre-tax basis. They can contribute a portion of their salary to the FSA to be used for these uncovered medical expenses. The portion of salary contributed to the FSA is not taxed.
Until now, it has been up to companies to set the limits on how much each employee can add to the FSA. Many companies have allowed annual contributions of $5,000 or even more. Starting in 2013, the tax law sets the limit at $2,500, regardless of your salary or wages. This dollar limit will be adjusted annually for inflation after 2013.
For employees who have been contributing more than $2,500 annually, they will have more wages which will be taxed. And they’ll still have to pay the out-of-pocket medical costs.
Higher itemized medical deduction floor. If you want to deduct your out-of-pocket medical costs, you must itemize (you cannot use the standard deduction) and your total costs must be more than a set amount. For many years, this has been 7.5 percent of your adjusted gross income (AGI). Thus, if your AGI is $50,000, the first $3,750 of legitimate medical costs cannot be deducted; only amounts over this threshold result in any tax write-off.
Starting in 2013, the medical deduction floor increases to 10 percent, although seniors age 65 and older can continue using the old floor through 2016. Continuing with the same example, you now get no tax relief for the first $5,000 of out-of-pocket costs if your AGI is $50,000.
What it all means. Add together higher out-of-pocket costs, lower FSA contributions, and a higher itemized medical deduction floor and you get more of a healthcare burden without any tax relief. What can you do?
• Examine your options this year. For example, if you’ve already crossed the 7.5 percent floor for itemizing your medical costs this year (or expect to do so before the end of the year), you may want to pay for some discretionary items, such as prescription sunglasses or have that laser eye surgery this year. (Remember that cosmetic surgery and procedures are not deductible unless done to correct an abnormality or defect and not simply for improving appearance.)
• Optimize FSA contributions. If both spouses work, each can have an FSA. The full $2,500 will be allowed for each spouse next year, even if they work for the same employer.
• Talk with your tax advisor. Determine how to maximize your write-off opportunities. This involves overall tax planning designed to lower your AGI as a way to boost your deductible medical expenses.
Perhaps the best advice of all is to stay healthy. This will reduce your need to spend on medical care and keep more money in your pocket.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s 1001 Deductions and Tax Breaks and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. She has been named one of the 100 Small Business Influencers. Follow her on Twitter @BarbaraWeltman.