News You Can Use

Highlights of the tax package passed by Congress late Thursday and sent to President Barack Obama. It would cost about $858 billion; most provisions, which were to expire Jan. 1, would be extended for two years, unless noted.The package extends:

Lower rates for taxpayers at every income level. The top rate, on taxable income above $379,150, would stay at 35 percent, instead of increasing to 39.6 percent. The bottom rate, on taxable income below $8,500 for individuals and $17,000 for married couples, would stay at 10 percent, instead of increasing to 15 percent. Cost: $186.8 billion.
More generous itemized deductions for high-income households. Cost: $20.7 billion.
A more generous $1,000 child tax credit. Cost: $71.7 billion.
Marriage penalty relief, increasing the standard deduction for married couples. Cost: $18 billion.
A more generous Earned Income Tax Credit for low-income families. Cost: $15.7 billion.
A series of tax breaks for students and their families, including interest deduction for student loans and an exemption for employer-provided educational assistance. Cost: $3.3 billion.
A deduction for tuition and related expenses for higher education, for 2010 and 2011. Cost: $1.2 billion.
A tax credit of up to $2,500 for students' higher education expenses. Cost: $17.6 billion.
The top capital gains tax rate of 15 percent. Cost: $25.9 billion.
The top tax rate on dividends of 15 percent. Cost: $27.3 billion.
Through 2011, enhanced jobless benefits for people who have been unemployed for long stretches. Cost: $56.5 billion.

A series of incentives for selling, using and producing alternative fuels, including ethanol. Many of the provisions expired at the end of 2009. They would be extended through 2011. Cost: $11.3 billion.
A $250 deduction for out-of-pocket classroom expenses by teachers, for 2010 and 2011. Cost: $390 million.
A federal income tax deduction for state and local sales taxes, taken mostly by people who live in the nine states without state income taxes, for 2010 and 2011. Cost: $5.5 billion.
The ability of older Americans to withdraw up to $100,000 a year from Individual Retirement Accounts, tax-free, to donate to certain public charities, for 2010 and 2011. Cost: $979 million.
A business tax credit for research and experimentation expenses, for 2010 and 2011. Cost: $13.3 billion.
Tax breaks for capital improvements to restaurants and other retail buildings, for 2010 and 2011. Cost: $3.6 billion.
A tax break for active investors in foreign-based banking, securities and insurance firms, for 2010 and 2011. Cost: $9.2 billion.
Increased depreciation and expensing for capital investments by businesses. Cost: $21.8 billion.

The package also:

Spares more than 20 million middle-income households from tax increases averaging $3,900 from the Alternative Minimum Tax in 2010 and 2011. Cost: $136.7 billion.
Imposes a lower estate tax for the next two years, allowing couples to pass estates as large as $10 million to heirs tax-free. The balance would be taxed at 35 percent. Cost: $68.1 billion.
Provides a one-year Social Security tax cut for all wage earners, from 6.2 percent to 4.2 percent. Cost: $112 billion.

The basic premium for Medicare Part B will be $115.40 a month in 2011, up from $110.50 in 2010 (a 4.4 percent increase). But because there will be no cost of living benefit increase for Social Security recipients for 2011, most beneficiaries will be exempted from paying this increase and will instead pay the same $96.40 premium amount they have paid since 2008.

A "hold-harmless" provision in the Medicare law prohibits Part B premiums from rising more than that year's cost of living increase in Social Security benefits. Since there is no Social Security increase, most beneficiaries -- about 73 percent -- will not have to pay any increased Part B premiums because of the hold-harmless provision.

Those covered by the provision will continue to pay Part B premiums of $96.40 per month in 2011. But this hold-harmless protection does not apply to the other 27 percent of beneficiaries -- about 12 million in all -- who either:
·        do not have their Part B premiums withheld from their Social Security checks, or ·        pay a higher Part B premium surcharge based on high income (see below), or ·        are newly enrolled in Part B.

All Medicare beneficiaries will be subject to the new deductibles and co-payments, as outlined below. Medicare Part B covers physician services as well as qualifying out-patient hospital care, durable medical equipment, and certain home health services, among other services.

Following are all the new Medicare figures for 2011:
·           Basic Part B premium: $115.40/month
·           Part B deductible: $162 (was $155)
·           Part A deductible: $1,132 (was $1,100)
·           Co-payment for hospital stay days 61-90: $283/day (was $275)
·           Co-payment for hospital stay days 91 and beyond: $566/day (was $550) ·           Skilled nursing facility co-payment, days 21-100: $141.50/day (was $137.50)

As directed by the 2003 Medicare law, higher-income beneficiaries will pay higher Part B premiums. Following are those amounts for 2011:
·     Individuals with annual incomes between $85,000 and $107,000 and married couples with annual incomes between $170,000 and $214,000 will pay a monthly premium of $161.50.
·     Individuals with annual incomes between $107,000 and $160,000 and married couples with annual incomes between $214,000 and $320,000 will pay a monthly premium of $230.70.
·     Individuals with annual incomes between $160,000 and $214,000 and married couples with annual incomes between $320,000 and $428,000 will pay a monthly premium of $299.90.
·     Individuals with annual incomes of $214,000 or more and married couples with annual incomes of $428,000 or more will pay a monthly premium of $369.10.

Rates differ for beneficiaries who are married but file a separate tax return from their spouse:
·    Those with incomes between $85,000 and $129,000 will pay a monthly premium of $299.90.
·    Those with incomes greater than $129,000 will pay a monthly premium of $369.10.

The Social Security Administration uses the income reported two years ago to determine a Part B beneficiary's premiums. So the income reported on a beneficiary's 2009 tax return is used to determine whether the beneficiary must pay a higher monthly Part B premium in 2011. Income is calculated by taking a beneficiary's adjusted gross income and adding back in some normally excluded income, such as tax-exempt interest, U.S. savings bond interest used to pay tuition, and certain income from foreign sources. This is called modified adjusted gross income (MAGI).

If a beneficiary's MAGI decreased significantly in the past two years, she may request that information from more recent years be used to calculate the premium.

Until now, a self-employed individual's federal income tax deduction for health insurance premiums could not be deducted as an expense when calculating his or her self-employment tax liability on Schedule SE.

Good news: For 2010, the health insurance premium deduction is allowed as an expense on Schedule SE. This can be a fairly big deal, especially if your health insurance deduction is significant.

Health Care Reform: 13 Tax Changes on the Way

Here are 13 changes in the massive overhaul that could impact your tax bill, for better or worse
By Joan Pryde
April 5, 2010

This is an updated version of a March 23 story, incorporating the final changes signed into law by President Obama on March 30, 2010.

The new health care reform law is chock-full of new taxes and tax increases that will affect many individuals and businesses, but it will be years before most of these hikes take a bite out of your -- or your company’s -- wallet.

The law also has tax breaks to help both individuals and small businesses pay for insurance.

1. A new 10% excise tax on indoor tanning services on services provided after June 30, 2010.

2. The new law gives small firms tax credits as incentives to provide coverage, starting this tax year. Employers with 10 or fewer workers and average annual wages of less than $25,000 can receive a credit of up to 35% of their health premium costs each year through 2013. The credit is phased out for firms larger than that and disappears completely if a company has more than 25 employees or average annual wages of $50,000 or more.

Beginning in 2014, the system changes. The law requires each state to establish a health insurance exchange -- a marketplace where individuals, the self-employed and small businesses can buy health insurance coverage. The government-regulated exchanges would offer insurance policies with different levels of coverage and price tags. Small firms that sign up with one of the health exchanges to be created can receive a credit of up to 50% of their costs -- with the same phaseouts for average income and size as the earlier program. The credit disappears after 2015.

3. A requirement that businesses include the value of the health care benefits they provide to employees on W-2s, beginning with W-2s for 2011. The amount reported is not considered taxable income.

4. Elimination of a deduction employers now take for providing Medicare Part D prescription drug coverage to their retirees to the extent that the federal government subsidizes the coverage. This will not take effect until 2013.

5. Doubling the penalty for nonqualified distributions from health savings accounts, to 20%, beginning in 2011.

6. A limit on the amount that employees can contribute to health care flexible spending accounts to $2,500 a year, but the cap won’t take effect until 2013. This was previously left to the employer's discretion, with many firms choosing a limit of $4,000 to $5,000 or so

7. A ban on using funds from flexible spending accounts, health reimbursement arrangements or health savings accounts for the cost of over-the-counter medications, starting in 2011.

8. Starting in 2013, a 0.9% Medicare surtax will apply to wages in excess of $200,000 for single taxpayers and over $250,000 for married couples. Also, for the first time ever, a Medicare tax will apply to investment income of high earners. The 3.8% levy will hit the lesser of (1) their unearned income or (2) the amount by which their adjusted gross income exceeds the $200,000 or $250,000 threshold amounts. The new law defines unearned income as interest, dividends, capital gains, annuities, royalties, and rents. Tax-exempt interest won’t be included, nor will income from retirement accounts.

9. A hike in the 7.5% floor on itemized deductions for medical expenses to 10%, beginning in 2013. But taxpayers age 65 and over are exempt from the cutback through 2016.

10. A new 40% excise tax, beginning in 2018, on high-cost health plans, levied on the portion that exceeds $10,200 for individuals and $27,500 for families. The provision is aimed mostly at gold-plated plans offered by employers, although it can affect individual policies

11. A new tax on individuals who don't obtain adequate health coverage by 2014 -- this is often referred to as the individual mandate.. The tax is to be phased in over three years, starting at the greater of $95, or 1% of income, in 2014, and rising to the greater of $695, or 2.5% of gross income, in 2016.

12. Providing a refundable tax credit, once the individual mandate takes effect in 2014, to help low-income folks purchase coverage. To be eligible, a person's household income must be between 100% and 400% of the federal poverty level, generally around $11,000 to $44,000 for singles and $22,000 to $88,000 for families. The credit is a sliding scale, based on income. Low-incomers get a credit for all costs. Then, as income rises, the credit phases out.

13. A nondeductible fee charged to businesses with 50 or more employees if the firms fail to offer adequate coverage. The fee will equal $2,000 times the number of employees, though it won’t count the first 30 workers in that calculation.

529 PLANS CAN BE USED TO PURCHASE COMPUTERS and SOME SOFTWARE IN 2009 AND 2010

Tax-free college savings plans and prepaid tuition programs -- so-called 529 plans -- can be used to buy computer equipment and services for an eligible student during 2009 and 2010. The change was part of the American Recovery and Reinvestment Act (ARRA), aka the Stimulus Bill, enacted earlier this year.

Named for Section 529 of the Internal Revenue Code, 529 plans enable taxpayers to reduce their taxable estates while earmarking funds for the higher education of a family member. Earnings from these accounts are tax-free, and grandparents often set them up to help grandchildren with college expenses.

Funds contributed to such accounts are invested to pay for an individual's college tuition, room and board, or other expenses. For 2009 and 2010, the ARRA change adds to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature.