Are You Prepared for Potential 2013 Tax Changes?

Several tax changes contained in the 2010 Healthcare Act are scheduled to take effect next year, unless Congress acts before then. Now is the time to begin planning for possible changes.

Here are three key changes that could potentially affect individual taxpayers in 2013:

$2,500 Cap on Healthcare FSA Contributions

Although many Flexible Spending Account (FSA) plans already impose annual limits, the Healthcare Act would impose the first tax-law limit on the amount you can contribute to your employer’s FSA plan each year, capping it at $2,500. After 2013 this amount will be indexed for inflation.  If you currently have an FSA plan, be sure to use your remaining contribution before the deadline. Keep in mind that when it comes time to select your 2013 benefits, the new limit could affect you.

Higher Threshold for Itemized Medical Expense Deductions

Currently, you’re allowed to deduct unreimbursed medical expenses (paid for you, your spouse, and your dependents) in excess of 7.5% of your adjusted gross income. Under the Healthcare Act, the deduction threshold will be raised to 10% of adjusted gross income for most individuals (age 64 and under) starting in 2013. In 2017, this will be expanded to include those age 65 and older.

Extra 0.9% Medicare Tax on Compensation and/or Self-Employment Income

Currently, the Medicare tax on employee compensation and/or net self-employment (SE) income is 2.9%. In 2013 The Healthcare Act will tack on an extra 0.9% Medicare tax to the current 2.9% Medicare tax on earned income in excess of $200,000 for individuals and $250,000 for couples married filing jointly and $125,000 if you are married and file separately.

Earned income includes both employee compensation and net self-employment (SE) income. Employees currently pay half of the tax at the current rate of 1.45%, which is withheld from the employee’s paycheck.  The employer pays the other 1.45%. If you are self-employed, you pay the entire 2.9% yourself although you are allowed an adjustment to gross income for one-half of the tax.

If you are married and file jointly, the extra 0.9% Medicare tax will be calculated based on your and your spouse’s combined earned income above $250,000.

You should keep this additional tax in mind when deciding if you should start making quarterly estimated tax payments next year. Shifting income into this year is one possibility, but may not be a good option depending on your situation. It is best to speak to your accountant about the best tax planning strategy for you.