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.