Peter Newton

I'm not going to get involved in the debate on the merits of the healthcare bill (I'll leave that for the other thread on here that's almost up to 500 posts!), but it's important to point out some important tax changes included in the bill. Just how important are they? Well, the Congressional Budget Office says the IRS will need $10 billion and 17,000 new employees to enforce its share of the new rules!

Here are some of the key tax provisions:

• Starting immediately, certain small businesses with less than 10 employees will get a 35% credit for the cost of providing employee health benefits.

• Starting in 2011, employers will have to report the value of health benefits on Form W2.

• The penalty tax for Health Savings Account distributions not used for health care expenses doubles from 10% to 20%. This will discourage using HSAs for supplemental retirement savings.

• Starting in 2013, the 7.5% floor for deducting medical and dental expenses climbs to 10% (unless you or your spouse are 65 or older, in which case it remains at 7.5% until 2016).

• Healthcare flexible spending account contributions are capped at $2,500 per year.

• Starting in 2014, businesses with more than 50 employees will have to offer heath benefits or pay a penalty of $750/employee.


There's also one more unwelcome surprise: currently, the Medicare tax is limited to 2.9% of earned income. The reconciliation bill imposes an additional Medicare tax of 0.9% on earned income above $200,000 (individuals) or $250,000 (families). It also adds a 3.8% "Unearned Income Medicare Contribution" on investment income - specifically, interest, dividends, annuities, royalties, capital gains, and rents - for taxpayers with Adjusted Gross Income above those same thresholds. Those new levies would take effect in 2013.

meauxna

Thank you, Pete, for the tax perspective summary on this!

chartreuse

Yes, thanks for the info Peter.

That's a bit harsh on writers, photographers, illustrators, game designers, programmers, songwriters etc., isn't it? Not to mention that calling it "unearned" is adding insult to injury.

Or have I got the wrong end of the stick?

meauxna

Yes, wrong end.

chartreuse

So what are these royalties that aren't what I understand by the word, then?

jamestravis

Seems to be only for people over $200,000/$250,000 in gross income.

chartreuse

And your point is?

jamestravis

That it's not as harsh to writers etc who make under the thresholds...

Michael

OK, this is a little confusing. Normally medicare tax is withheld by the employer with both the employer and employee each paying 1.45%. Now it would make sense that above a certain threshold, the employer and employee would each contribute 1.9%. However, your statement indicates that there is a different threshold depending on whether it is an individual or a family.

Therefore does the employer and employee only pay 2.9% combined and then the employee figures out family income and pays the difference when he files tax returns?

Peter Newton

The IRS will have to figure out how this gets implemented (I'm sure some of those 17,000 extra employees will be charged with this task!). I imagine there will be some kind of medicare witholding allowance certificate that employees file with their employers (much like the current W-4), and then you settle up any difference at the end of the year. Don't know how that will work from the employers side though...

Michael

If it is based on total family income, they won't know how much to withhold unless they know the other persons income. I don't see how it could be accurately figured out until the end of the year (one person may quit or get a bonus).

Or do you think that when they refer to families, that means that each member of the family wouldn't be affected unless either of them made $250,000. That doesn't make much sense since a family could make $500,000 but an individual could only make $200,000 without being affected.

meauxna

I'd understand it as, people are paid for that work when initially producing it; royalties are unearned income.

chartreuse

Ah, but that's not the case. For example, the author of a novel may get an advance against royalties but that is not wages and the publisher is not his employer. She is a self-employed worker, the work is the writing of the novel (and other stuff) and the total income earned for that work is the sum of all the royalties received.

Seems very unfair to call in "unearned".

simongb

In all the news articles I've read and all the sound bites I've heard, this is the first time I've actually seen something concrete about what the bill is all about. Thanks for posting this information!

fatbrit

What Catman said.

My OH earns royalties from published artwork. The payment is usually two-fold: a lump sum on the initial contract followed by royalties paid quarterly on every item sold with the artwork on it.