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Beware 6 tax increases triggered by the health care reform law in January 2013

by Tony Novak, CPA

Taxes will be higher in 2013 for most of us. Some of the higher taxes were triggered by passage of the health reform law back in 2010. For the first few years 2010-212 we saw mostly benefits from the law but next year (2013) marks the beginning of the payback period for this expensive legislation.

The six tax increases triggered by the Patient Protection and Affordable Care Act of 2010 (PPACA)1 that take effect in January 2013 are listed below:

 1) Rules for deductions for federal subsidies for retiree prescription plans under IRC Sec. 139A are changed to eliminate the rule that the exclusion for subsidy payments is not taken into account for purposes of determining whether a deduction is allowable for retiree prescription drug expenses. This has the effect of reducing the allowable medical expense tax deduction.

2) The maximum amount available for reimbursement of incurred medical expenses under a IRC Sec. 125(i) - Health Flexible Spending Arrangements for a plan year can not exceed $2,500. Those with high medical or dental expenses will be adversely affected.

 3) Medical care deduction threshold for the itemized deduction for unreimbursed medical expenses under IRC Sec. 213 is increased from 7.5% of Adjusted Gross Income (AGI) to 10% of AGI for regular income tax purposes. (This increased is delayed until 2017 for a limited number of taxpayers).

4) Medicare tax is increased to include a tax of 3.8% under IRC Sec. 1411 of the lesser of the individual's net investment income for the year or the amount the individual's modified AGI exceeds a threshold amount.

5) Employee portion of the Medicare hospital insurance tax part of FICA is increased by 0.9% on wages of high income taxpayers that exceed a threshold amount under IRC 3101.

6) An excise tax of 2.3% on the sale of any medical device by the manufacturer, producer, or importer of the device under IRC Sec. 4191.

Additionally, outside of the health care law commonly known as Obamacare, a range of other federal income and estate tax increases are scheduled to become effective at the same time. The overall tax increases taking effect in January 2013 could be the largest in decades for many individual taxpayers. This could have a significant effect on personal finances as well as the overall economy.

 Advance planning can help mitigate the financial impact. Freedom Benefits  urges everyone to schedule a personal financial checkup before year end that includes a tax review to scan for opportunities to reduce next years taxes. For those with limited time availability, the review can even be completed by telephone or Skype during evening or weekend hours. The accountant will request a copy your paycheck stub and last year's tax return, if available, in advance of the review to prepare a list of discussion points.

1 More detailed coverage of this topic in a format suitable for tax professionals is available from the Freedom Benefits University educational Web site here.

About the Author: Tony Novak, CPA, MBA, MT, is a financial planner based in the Philadelphia area. He serves middle income professional and self-employed clients and has authored hundreds of articles on tax planning and related topics. He can be reached through his personal Web site at