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Talking Tax: Plan now for impending tax changes

Q: I have heard that the Supreme Court’s decision to uphold Obamacare will mean people without health insurance will pay more in taxes. How will this new tax work?

A: The Patient Protection and Affordable Care Act, and the Health Care and Education Reconciliation Act of 2010 – or “Obamacare” as these two bills are popularly known – mandate that, beginning in 2014, an annual penalty will be assessed on every American who does not have a minimum level of health insurance coverage. This is commonly referred to as the “individual mandate.”

The politicians supporting the law and the actual text of the law avoided the term “tax” in favor of the term “penalty.” But in its decision, the Supreme Court upheld the individual mandate portion of the law by stating that the penalty is actually a tax that Congress does have authority to legislate.

Beginning in 2014, the penalty (or tax) will be $95. This amount increases over time to $325 in 2015 and $695 in 2016. After 2016 the penalty is indexed to inflation. For uninsured children younger than 18, the penalty is half the adult amount, and there are limitations on the maximum amount any one household must pay (generally 300 percent of the adult penalty for that year). The penalty will be reported on your annual income tax return.

But there are several exceptions to the penalty, including exemptions for religious reasons, for people residing outside the U.S., and an 8 percent of personal income limitation. For example, if a family’s monthly income is $5,000, the penalty will not apply if the cost of the insurance is more than $400 per month.

Of course, we have not heard the end of the health care debate, so stay tuned for further developments.

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Q: I find all the talk of the expiration of the Bush tax cuts and the new health care law very confusing. What tax issues do I really need to watch out for this year?

A: I can’t speak directly to your personal tax situation without much more information, but let me address some of the big issues that are on the horizon. First, 2012 is a bit of a calm before the storm of 2013. There are a number of tax breaks that expired at the end of 2011, including the research and development credit, 100 percent “bonus” depreciation, and some of the education tax incentives. Congress has historically extended many of these provisions on an annual basis, so we will need to wait and see if they follow suit this year. But so far there is relatively little new in the tax law for 2012.

But on Jan. 1, 2013, many significant tax law changes kick in. Here are a few (not all) of the big items to think about:

  • The so-called Bush tax cuts expire, and tax rates for most Americans will rise. The maximum regular rate will be 39.6 percent (up from 35 percent), but even the lower tax brackets will increase. The lowest 10 percent rate will be replaced with a 15 percent rate, and the hotly debated capital gains tax rate will jump from 15 percent to 20 percent (although in some cases other capital gains tax rates may apply). With no Congressional action many, if not most, Americans will see their tax bills rise.
  • The estate and gift tax exemption plummets from $5 million to $1 million, and the maximum tax rate skyrockets from 35 percent to 55 percent.
  • An additional Medicare tax (the HI Tax) will kick in and increase the Medicare tax from 1.45 percent to 2.35 percent on high-income workers (single filers earning more than $200,000 and joint filers earning more than $250,000). This bumps the maximum 39.6 percent rate up to 40.5 percent. Employers should take special note to make sure payroll systems are up to date before 2013 arrives.
  • A 3.8 percent Unearned Income Medicare Contribution tax also begins. This new tax is levied on most investment income, such as interest, dividends, rents, royalties and capital gains on high-income taxpayers. It also applies to business income flowing into a Form 1040 if the individual is not active in the enterprise. The tax increases the maximum rate on most investments from 39.6 percent to 43.4 percent and the capital gains rate from 20 percent to 23.8 percent.

The first two increases, in income and estate taxes, may not occur. Congress took those same issues to the brink in 2010, and in December of that year reached a compromise that essentially extended the present system. But the two increases from the health care legislation are a certainty.

These are just a few significant tax issues on the horizon; there are many more. It seems almost certain that regardless of the results of the November election, taxes are on the rise. So get with your tax adviser now and begin planning for the storm that is coming.

To ensure compliance imposed by IRS Circular 230, any U. S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.

Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.

Have a question for Robbins? Email your question to news@idahobusinessreview.com. Enter “Talking Tax” in the subject line.

About Peter G. Robbins, CPA