Patient Protection and Affordable Care Act
The Patient Protection and Affordable Care Act states that for the tax year 2011 employers will be required to report the value of health care benefits on the W-2 form that is required to be issued by January 31, 2012. Although the benefits are required to be disclosed on the W-2, they will not be included in the gross wages and therefore are not subject to income tax. Even though the benefits are exempt from income tax, there are two general reasons that this information is now being required to be reported on the W-2 form.

The first reason is that beginning in January 2014 the new health insurance law imposes an excise tax on individuals who do not maintain ”minimum essential coverage”. The W-2 reporting requirement will assist the Internal Revenue Service (IRS) in verifying that taxpayers are maintaining health insurance for themselves and their dependents. The second reason for the reporting requirement is to identify taxpayers who maintain health insurance policies that cost significantly more than the national average.

These policies are referred to as “Cadillac” policies. These types of polices are also subject to an excise tax imposed on the individual. The W-2 reporting will enable the IRS to easily identify taxpayers who are subject to the tax. In general, the “Cadillac” tax does not go into effect until 2018. It will apply to health insurance plans with premiums that exceed $10,200 for individual coverage and $27,500 for family coverage. It is anticipated that most people will not be subject to this excise tax.

As a reminder, it continues to be the policy of the IRS not to communicate with taxpayers via e-mail. If you receive an email claiming to be from the IRS, it is not. You should not respond to the email in any manner. If you receive a phone call from the IRS or any other government agency, you should inform them to send their request via written correspondence. When you receive any correspondence from a government agency, please forward a copy to us so we may advise you accordingly.

Maryland Enacts Emergency Job Creation and Recovery Tax Credit
Maryland Governor Martin O’Malley has signed legislation enacting the job creation and recovery tax credit.  The income tax credit is available to qualified employers and is intended to address the state's current economic situation by creating new jobs in Maryland for unemployed Maryland residents currently receiving state unemployment insurance benefits.

A $5,000 per qualified employee credit, not to exceed $250,000 in total credits per qualified employer, is available to a qualified employer who hires a qualified employee to fill a qualified position with employment beginning on or after March 25, 2010 and on or before December 31, 2010. The credit is claimed on the employer’s state income tax return.  Any excess credit for the year can be claimed as a refund. The qualified employer must submit to the Maryland Comptroller a state income tax return for the taxable year to which the Maryland Department of Labor, Licensing and Regulation's certification of the approved credit amount applies and a copy of the certification.

Qualified employee. A “qualified employee” is an individual who, at the time of hiring, is a Maryland resident, is receiving unemployment insurance benefits or has exhausted such benefits within the past 12 months, and is not employed full time.

Qualified employer. A “qualified employer” is a person that conducts or operates a trade or business in Maryland and files Maryland income tax returns, or is an Internal Revenue Code Sec. 501(c) organization operating in Maryland, and is certified by the Department as qualifying for the tax credit. If, at the time of filing, payments of unemployment insurance contributions, state income taxes, withholding taxes, other debt, or other accounts due Maryland are delinquent, then the employer is not eligible for the credit.

Qualified position. A “qualified position” is a position that is full time, requires or is expected to require the services of an employee for an indefinite duration and without interruption for a period of 12 months or more, is located in Maryland, and is newly created or has been vacant for a period of at least six months at the time of hiring. However exceptions apply.

Vacated positions. A qualified position must remain filled for a period of one year after the qualified employee is hired and begins employment. If the position is vacated prior to the expiration of the 1-year period, the qualified employer must immediately notify the Department. If a position is filled for less than the required 1-year period, the qualified employer is entitled to a pro-rata portion of the tax credit based on the duration of employment. If any qualified position is vacated for any reason, the qualified employer must submit an amended application to receive the credit for hiring a replacement qualified employee for the vacated position.

Tax Changes Affecting Individuals in the 2010 Health Care Act
On March 23, 2010 the President signed the Patient Protection and Affordable Care Act, known as the 2010 Health Care Act.  Below is a summary of the more widely applicable tax changes in the new law for both individuals and businesses.

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. 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. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, those without coverage for less than three months, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.

Premium assistance tax credits for purchasing health insurance. The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. 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 refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income to the Exchange. Based on the information provided to the Exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.

Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be hit with a tax increase on wages and a new levy on investments.

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. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). 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 tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts.  Self-employed persons will pay 3.8% on earnings over the threshold.

Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will 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). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won't apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax.

Floor on medical expenses deduction raised from 7.5% of adjusted gross income (AGI) to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer's AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.

Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% of the disbursed amount, effective for distributions made after Dec. 31, 2010.

Limit health flexible spending arrangements (FSAs) to $2,500.   An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in a cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent coverage in employer health plans. Effective on the enactment date, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

We hope this information is helpful.  If you have any questions please do not hesitate to contact our office.