On March 30, 2010 President Obama signed into law the Health Care and Education Reconciliation Act of 2010, modifying the Patient Protection and Affordable Care Act which was signed a few days earlier. Many of these reforms are scheduled to take effect over the next few years. This article will focus on several of the of the over 50 changes scheduled to take effect during 2011.
Increase in federal tax rates
New rates are scheduled to become effective January, 2011 increasing the top four tax rates and eliminating the lowest bracket completely. Those who paid tax in the lowest rate will see tax increased from 10 percent to 15 percent. The other brackets move as follows: 25 percent to 28 percent; 28 percent to 31 percent; 33 percent to 36 percent; and, 35 percent to 39.6 percent. If at all possible consider paying salary and bonuses in 2010, as tax will be lower in 2010.
Higher taxes on investment gains
During the past several years, investors have paid tax at a 15 percent maximum federal rate on long-term capital gains and qualified dividend income. Beginning in 2011, the federal rate on long-term capital gains increases to 20 percent and dividends will again be treated as ordinary income, so rates can be as high as 39.6 percent. Investors could pay as much as 2.64 times the tax on qualified dividends with this change. Only look to sell for the 15 percent capital gains rate in 2010 if you are truly ready to cash in the stock for its profits.
Return of the Estate Tax
During 2010, under to law at the time this article is written, the estate tax is repealed. Decedents dying this calendar year are not required to pay any tax on the value of their assets at death. However, in 2011, the tax is scheduled to revert to 2000 levels—55 percent estate tax rates on taxable estates between $1,000,000 and $10,000,000 in value and 60 percent tax on estates of greater value.
Fewer deductions for high income taxpayers
In 2011, the tax law reverts to 2000 limits on personal exemptions and itemized deductions for the taxpayers in the two highest tax brackets. Deductions which are not subject to the reduction are:
- medical expenses,
- casualty losses,
- investment interest, and
- wagering losses to the extent of wagering gains
Changes in the earned income, child care, dependent care and adoption credits
Laws effective in 2011 will eliminate many of the benefits of the earned income credit, reduce the child tax credit to $500 per qualifying child reduce the dependent care credit, but has increased the adoption credit by $1,000.
Small Business Tax Credit
Beginning in 2010 and extending through 2013, small business, defined as those with no greater than 25 employees and annual wages of no greater than $50,000 who contribute at least one-half of the cost of health insurance premiums for its participating employees may qualify for a tax credit of up to 35 percent of the cost of health insurance. Employers with 10 or fewer employees with annual wages of less than $25,000 could be eligible for a credit equal to the full cost of insurance. Employers with between 11 and 25 employees with average compensation between $26,000 and $50,000 may qualify for a reduced credit.
Changes affecting flexible spending arrangements
Effective January 1, 2011 new rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements. Under the new rules, over-the-counter medicine or drugs cannot be reimbursed from the accounts unless a prescription is obtained from a health care professional. The change does not affect insulin, and other expenses such as medical devices, contact lenses, eyeglasses, and co-payments. Similar rules also go into effect for Health Savings Accounts and Archer Medical Savings Accounts.
Other tax changes to watch out for
These are a few of the many tax law changes that will begin to affect individual and small businesses. The changes will have an effect on the majority of taxpayers, and the 2010 and 2011 changes are only a part of the myriad of tax increases most will face in the following years. Other changes to come include excise taxes on high-cost employer-sponsored health coverage, additional reporting requirements for the value of health insurance benefits on forms W-2, filing information tax returns for business payments to vendors in excess of $600 per calendar year, non-deductible fees for health related industries, such as pharmaceutical manufacturers and importers, increased Medicare tax for high income taxpayers, Medicare tax on investment income, such as dividends, interest, royalties and rents, and more.
Gerard J. Kassouf, CPA is a director at the Birmingham, Alabama firm of L. Paul Kassouf & Co. P. C., Certified Public Accountants and Advisors--representing privately-held and family-owned businesses. You can reach him at gkassouf@kassouf.com
