You literally can’t open a financial website or check out a financial magazine without hearing about the New Health Care Surtax and I don’t know why It isn’t that a new tax of this magnitude isn’t important it is that just the majority of the people, call it 95%ish, will never encounter the new tax yet it is everywhere.
What is the New Health Care Surtax?
To partially pay for ObamaCare there was a new tax introduced, put simply by BNA-Bloomberg,
Beginning in 2013, individual taxpayers making over $200,000 annually ($250,000 for married individuals who are filing jointly) will be subject to increased Medicare tax rates (2.35%, up from 1.45%) and an “unearned income” healthcare surtax of 3.8% on all interest, dividend, capital gain, and passive business income.
Put a bit more complicated by the WSJ,
Determining whether you will be subject to the tax is no easy matter.
“The confusion lies in the fact that it’s not a yes or a no,” says Melissa Labant, director of tax for the American Institute of Certified Public Accountants. “It’s a sometimes or a maybe.”
“We’re waiting for guidance from the IRS on a lot of specific issues,” she adds. “We don’t have all of the answers yet.”
If I had to guess planning for this new tax is going to complicated albeit very interesting for financial planners, accountants and lawyers. For example, tax deferred insurance based investments would not be included in investment income and thus would become even more popular.
Similarly, avoiding family attribution rules and business succession planning will get a lot of attention as it will be even more important to keep a divesting business owner under that threshold. Just off the top of my head lets say you have someone selling a business for $X. Couldn’t one just create a demand note and then demand the exact amount that will keep him or her under that tax. By setting it up that (and I know it would be a little bit more complicated than I am making it – i.e. a buyer would probably want a chance to reduce principal) you could get “net to family” 4% more during the seller’s life with a balloon note payable at death. Not an insignificant amount.
One could even argue that small business owners can alter their compensation schedule to include more taxable income and less investment income. It would also push those same owners to actually utilize tax deferred retirement accounts more aggressively as it would lower their MAGI.
With all this interesting new planning ideas why don’t I understand the attention? Because it will affect virtually no one.
The New Health Care Surtax Is Likely not to Affect You
Let us go directly to the IRS data which is problematic for two reasons. One it is from 2009 and two, it provides Adjusted Gross Income and not Modified Adjusted Gross Income which is what the tax is based on. For an example of why that makes a difference:
Here is a quick formula to determine if the the 3.8% surtax will apply:
- MAGI less than or equal to the threshold amount = no tax
- MAGI greater than the threshold amount = Tax is 3.8% of the lesser of investment income; or MAGI threshold amount
Note that the surtax liability is determined on income BEFORE any tax deductions (page 2 of Form 1040) are considered. As a consequence, a client with lots of deductions could be in the lowest tax bracket and yet have investment income that is subject to the surtax!
I am sure someone a lot smarter than I could mine the data from the IRS to figure out the number but let us take a simplistic look at just AGI:
* The footnote  indicates less than a .05%
You may have to click to see it clearer but if you are not in the top 3% of earners for the country this is not a tax you need to worry about. Even if we were to triple that number due to the fact we are dealing with Modified Adjusted Gross Income…we are only at 9% of the Country.
My Theory as to Why I think People Care
Almost everyone wants to be rich and have a high income, if they say otherwise they are lying to you and themselves, and just don’t want to do what it takes to get there. I know that statement sounds negative but it is not. Could I make more? Maybe, but time with my Son is just so damn important to me.
Proof of that that statement is that people are consistently defending policies that are only affecting the top 3 to 9% of the Country. If you even mention the death tax people go completely nuts, but again that only affects 1 to 3% of the Country!
Let me be clear I am not a fan of Obamacare as it is written today and being implemented over the next couple year, but I just don’t understand why some of the financial media is jumping on it like most of their readers are in the top one-tenth of the country.