Noteworthy 2013 Healthcare Provisions

The 2010 Healthcare Act included several significant tax changes scheduled to take effect next year. Listed below is information on two provisions that could impact numerous taxpayers. We have also noted what you can do before year-end to minimize the negative impact of these provisions.

$2,500 Cap on Healthcare Flexible Spending Account (FSA) Contributions. Before the Healthcare Act, there was no tax-law limit on the amount you could contribute each year to your employer’s healthcare FSA plan. That said, many plans have always imposed their own annual limits. Amounts you contribute to the FSA plan are subtracted from your taxable salary. Then, you can use the FSA funds to reimburse yourself tax-free to cover qualified medical expenses. Good deal! Starting in 2013, however, the maximum annual FSA contribution for each employee will be capped at $2,500.

Note: An employee employed by two or more unrelated employers may elect up to $2,500 under each employer’s health FSA.

Tax Planning Implications: If you have an FSA plan, your employer will ask you near the end of the year to decide how much you want to contribute to your healthcare FSA for 2013. At that point, the new $2,500 contribution limit may affect you. Other than that, just make sure you use up your 2012 contribution before the deadline for doing so.

Higher Threshold for Itemized Medical Expense Deductions. Before the Healthcare Act, the allowable itemized deduction for unreimbursed medical expenses paid for you, your spouse, and your dependents equaled the excess of your qualified medical expenses over 7.5% of your adjusted gross income (AGI). Starting in 2013, the deduction threshold will be raised to 10% of AGI for most individuals. However, if either you or your spouse reaches age 65 by December 31, 2013, the new 10%-of-AGI threshold will not take effect until 2017 (in other words, the long-standing 7.5%-of-AGI threshold will continue to apply to those taxpayers for 2013–2016). Also, if you or your spouse turns age 65 in any year 2014–2016, the long-standing 7.5%-of-AGI threshold will apply for that year through 2016. Starting in 2017, the 10%-of-AGI threshold will apply to everyone.

Tax Planning Implications: If you will be affected by the new 10%-of-AGI threshold next year, consider accelerating elective qualifying unreimbursed medical expenses into 2012 so that your allowable medical expense deduction for this year will be based on the more taxpayer-friendly 7.5%-of-AGI threshold.

Capital Gains and Losses

Technically, almost everything you own and use for personal, pleasure, or investment purposes is a capital asset. Capital assets include, but are not limited to, homes, household furnishings, stocks, bonds, and mutual funds. When a capital asset is sold, the difference between the amount you paid (your basis) and the amount you sold it for is generally a capital gain or loss.

Here are some important facts about capital gains and losses:

• You must report all capital gains on your federal tax return. For most taxpayers, these generally include a primary residence (subject to significant gain exclusions), stocks, bonds, and mutual funds.
• You may deduct capital losses only on investment property (e.g., stocks and mutual funds), not on property held for personal use (e.g., homes and furnishings).

• Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it for more than one year, your capital gain or loss is long-term. If you hold it for one year or less, your capital gain or loss is short-term.

• The tax rates that apply to long-term capital gains are generally lower than the tax rates that apply to short-term capital gains and wages.

• If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

• If your total net capital loss is more than the annual limit on capital loss deductions, you can carry over the unused part and treat it as if you incurred it in the following year.

The Importance of Updating Beneficiary Designations

Most of us have more than enough to do. We’re on the go from early in the morning until well into the evening—six or seven days a week. Thus, it’s no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow, the next day, or whenever.

A U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife Liv as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.

When William died, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William’s estate sued the plan, saying that because of Liv’s waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William’s designation of Liv as his beneficiary was done in the way the plan required; Liv’s waiver was not. Thus, the plan rightfully paid $400,000 to Liv.

The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important points.

The first is that if you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan’s official beneficiary form rather than depending on an indirect method such as a will or divorce decree. The second point is that it’s important to keep your beneficiary designations up to date. Whether it is because of divorce or some other life-changing event, beneficiary designations made years ago can easily become outdated.

One final thought regarding beneficiary designations: while you’re verifying that all of your beneficiary designations are current, make sure you’ve also designated secondary beneficiaries where appropriate.