April 26, 2010

This is the fourth out of five columns regarding the impact of the 2010 Health Reform legislation to individuals.  As we spoke two weeks ago regarding higher Medicare taxes on high-come taxpayers, the health reform legislation comes with a price tag which is sure to impact us all either through higher and new taxes or through cuts to existing tax deductions.  The following three tax changes will affect most of us in the coming years.

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 on reimbursement of over-the-counter medications from HRAs, 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 an HSA or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

As these last two tax changes take effect next year and  benefits of the health reform legislation aren't scheduled to begin until 2014, it is not wonder there are so many taxpayers who are confused about what exactly has been reformed?

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).