2013 will be a big year for health care, with several provisions from the Patient Protection and Affordable Care Act becoming effective.
On the benefits side, Medicare Part D participants will see increased subsidies to reduce drug costs as they reach the gap in their drug coverage. Known as the “donut hole,” the coverage gap begins after you and your drug plan have spent $2,970. In 2013, participants will pay 47.5% of the cost for covered brand-name drugs and 79% of the cost for covered generic drugs. The entire price of your prescription will count as out-of-pocket costs, which will help you get out of the coverage gap.
With a Section 125 cafeteria plan flexible spending account, you chose an amount to be deducted from your paycheck before federal and state income taxes are deducted. The money is then used for reimbursement of medical expenses, not covered by insurance, such as, deductibles, co-pays, prescription drugs, dental services or eye care. The Patient Protection and Affordable Care Act reduced the annual contribution limit to $2,500, subject to annual increases for cost-of-living adjustments.
Medical expenses that meet certain qualifications may be tax-deductible, using an itemized deduction. In 2013, the threshold for itemized deductions increases to 10% of adjusted gross income. However, for taxpayers age 65 and older, the threshold remains at 7.5% of adjusted gross income.
Unfortunately, some tax increases outlined in the Patient Protection and Affordable Care Act take effect next year, including additional Medicare taxes on wages for high-income individuals. Currently, employees pay 1.45% of their wages into Medicare, with the other 1.45% paid by the employer. In 2013, individuals with wages exceeding $200,000 ($250,000 for married couples filing jointly, and $125,000 for individuals married filing separately) will pay an additional 0.9% on their earned income above that threshold. There is no employer match on the additional tax.
In addition, those same high-income individuals should see the new 3.8% Medicare contribution tax on unearned income. The tax is calculated by multiplying the 3.8% tax rate by the lower of either net investment income for the year, or modified adjusted gross income over a certain threshold amount. The 3.8% Medicare “surtax” is a complicated subject, which I’ll be covering in my column soon.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.