With the March 30, 2010 passage of Healthcare Reform and the December 17, 2010 passage of the Tax Relief Act, individuals and families need to understand how the new rules will affect their bottom line. Here are my top 10 facts you should know:
1. Over the counter medications no longer qualify for reimbursement in pre-tax medical flexible spending accounts. Previously, account holders could be reimbursed for expenses like bandages, aspirin, contact lens cleaner, etc. Beginning Jan. 1, 2011, only prescription drugs and insulin qualify as “medication” for reimbursement. Doctor/Dental/Optometrist co-pays/expenses still qualify for reimbursement.
2. A dependent can maintain health coverage under the parent/guardian’s employer medical plan through the age of 26. Previously, the cut off was through age 18, or 24 is the dependent was a full-time student. This is impactful for families of young adults who may be unemployed, returned to college/grad-school or working without medical insurance.
3. Employers have to now disclose their costs of providing medical benefits on each employee’s W-2. There has been some confusion about this because even though those costs have to be reported on the employee’s W-2, the cost is NOT taxable income for the employee. It’s just reported on the form. Previously, these costs did not have to be disclosed.
4. All employees in 2011 will receive a one-year payroll tax cut. This cut comes from a 2 percent decrease in an “employee’s share” of social security taxes. The social security tax is assessed on a maximum of $106,800 of wages, per wage earner, in 2011. The employee portion used to be 6.2 percent. This year, it will be 4.2%. So for a family with wages totaling $90,000, their take home pay will increase $1,800. The 2 percent decrease also applies to self-employed individuals in 2011 – their social security tax will be 10.4% vs. 12.4% this year.
5. The maximum federal income tax rate remains the same for the next two years. Because the Bush-era tax cuts were extended through Dec. 31, 2012, this means that the maximum income tax rate for 2011 and 2012 remains at 35 percent. Also, the rate on qualified dividends and long-term capital gains remains at 15 percent through 2012. Below is a table with the 2011 Tax Rates & Brackets:
|Tax Bracket||Married Filing Jointly||Single|
|10% Bracket||$0 – $17,000||$0 – $8,500|
|15% Bracket||$17,001 – $69,000||$8,501 – $34,500|
|25% Bracket||$69,001 – $139,350||$34,501 – $83,600|
|28% Bracket||$139,351 – $212,300||$83,601 – $174,400|
|33% Bracket||$212,301 – $379,150||$174,401 – $379,150|
|35% Bracket||Over $379,150||Over $379,150|
6. Marriage Penalty Relief extended through 2012. The size of the 15% tax bracket and standard deduction for joint filers remains at 200% of individual filers for 2011 and 2012. Without the extension, joint filers would only receive 167% of the individual amount.
7. Alternative Minimum Tax Patch for 2010-2011. For 2010 the AMT exemption is $47,450 for individual tax payers and $72,450 for married taxpayers filing jointly. For 2011 the exemption is set at $48,450 and $74,450, respectively. Without the patch, the 2010 exemption would have dropped to $33,750/$45,000, respectively.
8. Estate Tax Reform. The federal gift, estate and generation skipping transfer tax laws has been set (for 2011 and 2012) at a unified $5 million portable exemption (excluding generation skipping) amount and a 35% transfer tax rate. The topic of gift, estate and generation skipping transfer taxes is a very technical and detailed one. I welcome comments and questions and suggest those interested in reading some more on this, check out this Wall Street Journal article or this NAEPC Journal of Estate and Tax Planning article.
With these new tax laws only being effective for two years…get ready for another legislative roller coaster in late 2012!