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How health reform affects your wallet


Last week we began exploring how the government plans to pay for tax reform, specifically through your taxes (and mine). This isn’t a bad thing, and certainly everyone knows that when you buy something, you’re going to have to pay for it. We’ve already looked at the individual mandate(penalty fees for those lacking health insurance); premium assistance tax credits, through which the government intends to help mostly middle-class people pay for health insurance if they don’t already have it; and the impact of higher Medicare taxesfor those with higher incomes, as well as the fact that the law extends the Medicare tax to investments.

Most nurses won’t be unduly affected by these changes. But we’re not done yet—and nurses are among the many who may be affected by the following changes.

1. The floor for the medical expense reduction will increase from 7.5% of adjusted gross income (AGI) to 10%. Under current law, taxpayers can take itemized deductions for unreimbursed medical expenses up to 7.5% of their AGI. The new law raises the threshold at which unreimbursed medical expenses become deductible to 10% of AGI. This change goes into effect January 1, 2013, except for those over age 65, who won’t be affected until 2016.

2. Health flexible spending arrangements (FSA) will be limited to $2,500. An FSA is one of several tax-advantaged financial accounts offered through employer-sponsored “cafeteria” plans. An FSA allows employees to contribute pretax dollars to an account set up by their employer. They can later withdraw these funds tax-free to pay for qualified health insurance premiums, out-of-pocket medical costs, day-care provider fees, or private preschool and kindergarten expenses. Current law doesn’t limit the amount you can contribute to an FSA from your paycheck. Under the new law, allowable contributions will be capped at $2,500 per year, effective after December 31, 2012.

3. Costs for over-the-counter medications can’t be reimbursed unless the drugs are prescribed by a physician. FSAs, Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (MSAs) as well as Health Reimbursement Accounts (HRAs) can no longer reimburse for over-the-counter medications tax free. This is effective for tax years beginning December 31, 2010.

4. Penalties will increase on nonqualified distributions from HSAs and Archer MSAs. The new law increases taxes on distributions that aren’t used for qualified medical expenses from 10% for HSAs and 15% for MSAs to 20% of the amount received, effective starting the January 2011 tax year.

But don’t despair. In my next blog, I’ll list a few tax advantages the law will provide for you. And then we can discuss some of the great opportunities health reform offers nurses!

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