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MONTHLY TAX NEWSLETTERApril 2010
Here we go. On March 23rd, President Obama signed the Patient Protection and Affordable Care Act into law. Below are some of the tax changes that were included as part of the Patient Protection Act:
Increased and Expanded Medicare Taxes
High-income taxpayers will be paying higher Medicare taxes. Under the current rules, individuals have Medicare taxes withheld from their salaries at a rate of 1.45% on each dollar earned at work. Since employers match the amount withheld, Medicare receives a total of 2.9% for each payroll dollar paid out. And unlike Social Security taxes which max out at $106,800, there is no cap for Medicare taxes. Self-employed individuals also pay Medicare taxes at a rate of 2.9% on all of their net earnings.
Starting in 2013, the employee portion of the Medicare tax jumps by a whopping 62%- from the current rate of 1.45% to 2.35% - on earned income in excess of $200k for single individuals and $250k for married couples. As of now, the employer match is slated to remain at 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers.
To make matters worse, for the first time since being enacted, the Medicare tax will also apply to unearned income. People over the $200k threshold should expect to pay Medicare taxes on interest, dividends, capital gains, and net rental income beginning in 2013.
Reduced Tax Breaks for Medical Expenses
Many employers offer their staff the ability to pay for their family's healthcare costs with pre-tax dollars through a Flexible Savings Accounts (FSA) included as part of their benefits package. Starting in 2013, the maximum amount of money that you can set aside in an FSA will be cut in half to $2,500 per year. Plus, medical expenses you can pay through the FSA will exclude certain items currently allowed, including OTC medications.
The Patient Protection Act also makes it even tougher for individuals to deduct their medical expenses. Starting in 2013, you can only deduct your family's medical expenses to the extent the allowable expenses exceed 10% of your adjusted gross income. That's an increase of one-third over today's threshold of 7.5% of AGI.
There is some good news, however. The rules do not impact the medical expenses allowed when calculating the dreaded AMT. Since the current threshold for deducting medical expenses under the AMT is already 10% of AGI, many people who are hit by this tax every year might not see any tax increase due to this change.
A third revenue raiser deals with the penalty for withdrawing money from a Health Savings Account that is not used to pay for your family's healthcare costs. Currently, this penalty is equal of 10% of each dollar withdrawn. Beginning in 2013, the penalty for non-healthcare withdrawals from an HSA doubles to 20%.
Penalty for No Coverage
Like the universal health insurance rules we have here in Massachusetts, the Patient Protection Act adds a penalty for individuals who don't have health insurance that meets a "minimum essential coverage" threshold. This new non-coverage penalty starts at $95 per person in 2014, jumps to $325 per person in 2015, and then jumps again to $695 per person the next year. After 2016, this penalty is indexed for inflation. Expect to report and remit this penalty as part of your federal income tax return.
More to Come
Who issues major tax legislation during the height of tax season? I'm sure we'll continue to focus on many of these new tax rules in our subsequent months' newsletters.
April 15th is just a few weeks away. Check out these alternatives to dropping the F-bomb as the due date for filing your 2009 tax returns approaches that we wrote about in our April 2009 newsletter.
Or listen to these podcasts about filing for an extension:
In a shocking development, the IRS recently announced that they will be honoring the FICA tax refunds submitted by residency programs and individual doctors. The catch is that only FICA taxes paid prior to 4/1/05 qualify.
As we wrote in our February 2001 newsletter, there was paperwork physicians could file to try to get back the FICA taxes paid during their residency if their program would not be trying to file for a FICA refund on their behalf. For years, this paperwork did nothing more than gather dust. Well, the IRS has stated that they will begin processing these claims shortly.
Here is the latest information available on the IRS Website:
The Internal Revenue Service has made an administrative determination to accept the position that medical residents are excepted from FICA taxes based on the student exception for tax periods ending before April 1, 2005, when new IRS regulations went into effect.
The IRS will, within 90 days, begin contacting hospitals, universities and medical residents who filed FICA (Social Security and Medicare tax) refund claims for these periods with more information and procedures. Employers and individuals with pending claims do not need to take any action at this time.
What are FICA taxes?
FICA stands for the Federal Insurance Contributions Act. FICA taxes are comprised of two separate taxes, social security and Medicare taxes that are paid on wages earned for services performed. Employers withhold and pay their employees’ share of the FICA taxes and also pay the employer share.
Why are FICA refunds being paid to medical residents and their employers?
Employers (typically hospitals and medical schools) and individual taxpayers (medical residents) began filing FICA refund claims in the 1990’s, based on their position that medical residents are students eligible for the FICA tax exception under Internal Revenue Code section 3121(b)(10). This is referred to as the student exception and may apply to a student at a school, college or university who is also an employee of that school, college or university. The employer’s FICA refund claims were for both the employer share and the employee share of the FICA tax. In some cases, individual medical residents filed their own claim for the employee share of the FICA tax. The IRS held the claims in suspense because there was a dispute as to whether the student FICA exception applied. The IRS has made an administrative determination to accept the position that medical residents are excepted from FICA taxes for tax periods ending before April 1, 2005, when new IRS regulations went into effect.
Who is eligible to receive a refund?
Institutions that employed medical residents and individual medical residents are eligible to receive refunds if they are covered by timely filed FICA refund claims. Institutions can be covered under FICA refund claims they filed themselves. Individual medical residents can be covered under FICA refund claims they filed themselves or under claims filed by the institutions that employed them. These refund claims are subject to the same requirements that apply to all FICA refund claims including verification by the IRS of the amount of the claim and payment of interest.
Can a FICA refund claim still be filed for periods before April 1, 2005?
No. The period of limitations for filing a claim for tax periods before April 1, 2005 has expired. If you are or were a medical resident, and you did not file an individual FICA refund claim, you may be covered by a FICA refund claim filed by your employer for the period you were a medical resident. You would need to contact your employer (or former employer) to see if they filed a FICA refund claim.
What is the significance of April 1, 2005?
On April 1, 2005, new regulations regarding the student FICA exception became effective. One part of these regulations states that an employee who works 40 hours or more (full-time employee) for a school, college or university is not eligible for the student exception. This part of the regulations excludes medical residents from the student exception.
If I filed a claim, what should I do?
Do not take any action at this time. The IRS will be sending each employer and individual medical resident who filed a FICA refund claim information within the next 90 days. This information will explain the actions you must take to receive your refund.
If I am covered under a claim that my employer filed, do I need to do anything at this time?
No. You can expect your employer to be in touch with you about the refund process. You will not be hearing from the IRS directly.
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