Healthcare & Tax Implications Continued...

Below, we are going to discuss some other areas to be aware of that are on the horizon.

Reimbursements from Health Savings Accounts (HSA’s), Flexible Spending Accounts (FSA’s), and Medical Savings Accounts (MSA’s)

Effective for distributions made after December 31, 2010, Over-the-Counter medications (non-prescription) will not be reimbursed any longer.

Increased Penalties

For non-qualified distributions made from HSA’s and Archer MSA’s that are not used for “qualified” medical expenses , the penalty has been increased to 20% for any distributions meeting this description made after December 31, 2010. This represents a 10% increase for the HSA penalty and a 5% increase for the Archer MSA penalty.

Capping FSA Contributions

Beginning with tax years after December 31, 2012, FSA contributions will be capped at $2,500 for health FSA’s. This dollar amount will be indexed for inflation after 2013.

7.5% Floor Increased to 10%

Medical expense deductions currently only come into play for those of us that have them in excess of 7.5% of AGI. If your 1040 adjusted gross income is $100,000, then not a single medical expense dollar you spend is deductible until you reach $7,500 in expenses. The new law raises this Floor to 10% beginning with tax years after December 31, 2012. So, with that same AGI of $100,000, your medical expenses now have to be in excess of $10,000 before they become deductible. For individuals who are 65 and older (and spouses), the AGI Floor of 7.5% will remain in place through 2016.

This legislation encompasses a lot to digest, and much of it is not effective immediately. Rather, it is being phased in over a number of years. The above items are a few that many of our clients will be effected by and dealing with. Although they are not in place for this 2010 tax season, they should be noted as planning for the future is done. Next week, we will check back in on this issue by examining the legislation‘s stance on high-income taxpayers and medicare taxes.

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