Tax Implications for Senior Health Care Reform

Jun 23rd, 2010 | By Sharon Shaw Elrod MSW EdD | Category: Senior Finances

The good news for all, including senior citizens, is that the new health care law will reduce the national deficit by $143 billion.  That alone is highly significant and welcome news.  But what are the other tax implications for retirees who live on fixed incomes and must, by necessity, keep the family budget under control?

A statistical perspective is helpful in understanding the tax implications.  The average annual income for a household in the United States in 2007 was $50,233.  Average income figures rise with each age group, until 64 when those figures begin to decline.  Households headed by persons above the age of seventy-five had a median household income of $20,467.  Only 1.93% of households had income exceeding $250,000; although the statistics are not available, it is reasonable to assume very few of these household nationwide are senior citizens.  Now for the effects of health care reform on taxes:

  1. Those couples with annual income greater than $250,000 (individuals, $200,000) will pay an extra 0.9% (nine-tenths of one percent) in Medicare payroll taxes and 3.8% tax on unearned income (investments).  Those with incomes below these levels will experience no change in taxes.  This tax affects the people with the highest incomes; those living on limited resources are not going to be affected. This tax change begins in 2013.
  2. Those with health savings accounts will also be affected.  Health savings accounts are those programs in which the insured deposits funds at the beginning of the year, then draws upon those funds to pay for approved health care during the year; the insured is required to spend the funds only on health care related expenses.  If funds are withdrawn for any other expenses, the tax on those withdrawn funds will be 20%.  That’s up from 10% currently.
  3. Seniors, when figuring your tax return for 2016 and beyond, onlymedical expenses in excess of 10% of your income can be deducted.  That will be up from 7.5% currently.  For those not yet in the senior citizen generation (less than 65 years of age) that change takes place in 2013.

For the vast majority of seniors and retirees, health care reform brings very little, if any, change in the amount of taxes you pay.  On the other side of the coin, senior citizens will feel the benefits in many ways already described here on Senior Citizen Journal.



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