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On December 8, 2003 President Bush
signed the Medicare Prescription Drug and Modernization Act of 2003.
Most of this 200-page law pertains to Medicare and prescription drugs and
does not go into effect until 2006. The last 10 pages however, go
into effect on January 1, 2004 and allow taxpayers to establish Health
Savings Accounts.
Taxpayers may contribute up to $2,600
for self-only accounts and up to $5,150 for family accounts. The
contribution is 1/2 of the annual deductible of the insurance plan with a
minimum allowable contribution of $1,000 for self-only plans and $2,000
for family plans. Taxpayers who are at least 55 may contribute an
extra $500 in 2004, $600 in 2005, $700 in 2006, $800 in 2007, $900 in
2008, and $1,000 in 2009 and thereafter.
The IRS has not yet decided if uninsured
taxpayers may contribute to these Health Savings Accounts.
These Health Savings Accounts are one of
the most significant tax changes in the last few years. To be
eligible for the full deduction, taxpayers must have adjusted gross income
of $150,000 or less for joint returns and $75,000 or less for separate
returns. In addition, taxpayers must either have no health insurance
or health insurance with at least a $500 deductible for self-only coverage
and at least a $1,000 deductible for family coverage. A partial
deduction is allowed for taxpayers filing jointly with adjusted gross
income up to $170,000 and taxpayers filing separately with adjusted gross
income up to $85,000. No deduction is allowed for incomes over these
amounts.
The contributions to these accounts are
deductible on the front of your return even if you do not itemize.
Because of how they are deducted, they will reduce your Ohio income tax
also. These contributions are deducted in the year they are made,
not when they are spent for medical expenses. The income that these
accounts earn is tax-free. The amounts spent on qualified medical
expenses are not taxable. Amounts taken out of these accounts that
are not for qualified medical expenses are subject to tax and a 15%
penalty.
Contributions to these accounts lower
adjusted gross income. This may allow taxpayers who's adjusted gross
income was just a little too high to qualify for a regular IRA, a Roth
IRA, a HOPE Scholarship credit, a Lifetime Learning Credit, a deduction
for Student Loan Interest, and a deduction for the Tuition and Fees
Deduction. These contributions reduce and may even eliminate the
taxpayer's exposure to the AMT tax.
Medical Expenses have been allowed as
and itemized deduction. However, these amounts are reduced by 7-1/2%
of the taxpayer's adjusted gross income. Using these accounts make
these expenses fully deductible. In fact, by using these accounts,
taxpayers filing a joint return and both at leas 55 years old, could
possibly use a standard deduction that is $5,000 higher than their
itemized deductions are after using these accounts to pay their medical
bills.
There is a provision for employer paid
plans. These amounts are deductible by the employer and not taxable
to the employee.
These rules are brand new. Be sure
to discuss your situation with our office before you make any
contributions. |
