Obamacare and You

July 14, 2012

Until recently, it was unclear what, if any, parts of the healthcare overhaul would survive the Supreme Court’s ruling. When the court affirmed the law, investors – and tax advisors – found themselves facing a new financial landscape.

Two accidents of history created The Affordable Care Act in its current form

First Senator Kennedy’s untimely demise in 2009 left the Democrats with a problem. They didn’t have the votes to reconcile a Senate bill without the public option against a House Bill with the public option. To avoid throwing the baby out with the bathwater, they passed the Senate Bill in the House without further reconciliation.

 

The second, unexpected, accident was not that the Supreme Court failed to overthrow the mandate, but that it DID overthrow the retroactive mandate for states to expand Medicare. They placed this decision back where it belonged: With each and every state.

 

So what do we have: A law that is complex, cumbersome, and in need of modification (regardless of one’s politics).

Looking at this from the viewpoint of a handicapper: With an architect of insurance exchange (market based) health care reform (Romney) running against the President who passed this same reform, what happens next? I wouldn’t bet against this bill surviving.

 

Will it save money? Absolutely not! Regardless of the outcome of the Supreme Court ruling, the cost of health care is driving our finances off a cliff for a number of reasons that can be neatly summarized in one word: Demographics. Or, to put it another way, Medicare spending is out of control and driven largely by age 65+ costs. This bill specifically does not address this new ‘Third Rail’ of politics. It will be the defining intergenerational squabble of the next decade.

The markets reacted with a definitive ‘shrug’ followed by a nice rally. One never really knows why the market does what it does (the rally may be unrelated; a response to Europe, for example). However, it’s important to understand that the markets have long-since priced-in the various alternate scenarios. And none of them were pretty; which is why the market shrugged. There are plenty of searing battles ahead, with or without The Affordable Care Act.

 

Your 3.8%

The bill includes a 3.8% surtax on net investment income for most joint filers with adjusted gross income of more than $250,000 (or $200,000 for single filers, further exaggerating the marriage penalty for dual-income professionals).

Starting on Jan. 1, 2013, the tax rates on long-term capital gains and dividends for these earners will jump from the current historic low of 15% to 18.8% if congress extends the current law. This is historically still quite low. If, on the other hand, Congress allows the tax rates set in 2001 and 2003 to expire – considered unlikely but certainly possible – the top rate on capital gains will rise to 23.8% and the top rate on dividends will nearly triple, to 43.4%!

 

This new tax will make accelerating taxable income to 2012 profitable for many taxpayers. The new levy is complex and each individual will need expert advice on the options available. Fortunately, the levy does NOT include payouts from an IRA, 401(k) or Pension plan. Also not included are life-insurance proceeds, municipal-bond interest, veterans’ benefits and certain business income. Consequently, this will barely affect the top 2%; it will impact the top 1%.

 

As you know, we work closely with our expert team to ensure that we’ve identified the optimal strategy for each client’s specific situation. Even so, I invite your questions about this added complex wrinkle to our convoluted tax code.

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