Health-Care Overhaul Imposes Wealth Taxes, Makes Roth IRA Conversions More Attractive

Last March Congress passed the landmark Patient Protection and Affordable Care Act. This radical policy forced many critics to ask “How is the government going to pay for this?” The answer to this million dollar (or $1 trillion according to the Congressional Budget’s Office’s projection) question? The health-care overhaul will impose two new taxes on earnings: 1) an extra 0.9% levy on wages for couples earning more than $250,000 (or $200,000 for singles) and a 3.8% tax on investment income for the same group. How could these taxes affect you?

Let’s say you and your spouse both earn $150,000, combined income is $300,000. In 2013, you will owe an extra 0.9% on the excess earnings over $250,000, or $450, in addition to your regular Medicare tax because your combined wages are above $250,000.

How will your investment income be affected? First of all, let’s define investment income. Investment income includes, interest, dividends, rents, royalties, captain gains in addition to the taxable portion of insurance annuity payouts (unless it is from a company pension). All of these types of investment income are subject to the 3.8% tax on amounts over the $250,000 (or $200,000 for single filers) threshold. For example, if you earned $60,000 a year, but have an investment income of $180,000, your total income is $240,000 and you are subject to additional tax. Because your investment income is $40,000 over the $200,000 threshold, you would owe $1,520.

How can you minimize these taxes? Essentially, your investment income is subject to the new tax when it increases your adjusted gross income. While social security and pensions are not investment income, they still raise your AGI. Here are some suggestions on how you can avoid increasing your AGI.

· Roth IRA conversions. These are an excellent option because they do not raise AGI and are not considered investment income.

· Defined-benefit pensions. If you are in a small business or have consulting income, pensions could be a good fit. Pensions are not investment income and you can contribute more with age.

· Installment sales if you are selling assets. If you are spreading out the income, you would minimize the tax.

· Life Insurance. If you purchase a policy, you could borrow from it and settle before death. You can avoid income tax on investment gains within the policy.

For more information, check out this article from the Wall Street Journal or give us a call!