Understanding the New Investment Tax

Now that the Supreme Court has ruled that the Patient Protection and Affordable Care Act (PPACA, aka ObamaCare) is constitutional, it is time to understand the PPACA’s aspects that everyone agrees really are a tax. Interestingly, the acknowledged taxes in ObamaCare are much larger than are currently expected to be collected under the individual mandate “tax” (although this article discusses the unintended consequences that might change this).

There are a dizzying number of new taxes in the PPACA. The largest of these taxes will directly affect all affluent persons and are detailed below. Those taxes on the affluent are:

1. A new investment tax, which is estimated to raise $123 billion over the next ten years.

2. A payroll surtax on earned income, which is estimated to raise $87 billion over the next ten years.

Additional information about the taxes and how they are calculated are in this article.  You will need to understand this additional detail before the following suggestions make sense.  If you are subject to the investment tax, consider the following tax minimization ideas:

  1. Maximize income at 2012’s lower rates, and push deductions into 2013. For investments that are likely to have a relatively short holding period, one should purposefully harvest gains in 2012, even if this means immediately re-purchasing the same investment.
  2. Municipal-bond income is more valuable than before. Tax-exempt interest does not increase one’s AGI, and is also not subject to the investment tax.
  3. Those looking to sell companies should attempt to close the transaction in 2012, and then not elect installment tax treatment.
  4. Because 401(k)s are exempt, increase 401(k) contributions.
  5. Because Roth IRAs and Roth 401(k)s are not taxable when withdrawn, Roth withdrawals will not increase one’s AGI. Conversion of regular IRAs or 401(k)s to a Roth account will decrease the amounts that will otherwise be subject to the investment tax.

Waiting on the above suggestions may be advantageous because it is possible that Congress and the President might alter this tax in the lame duck session after the elections. However, some items (like accelerating the sale closing of a business or residence) will need to be initiated much earlier.

These PPACA tax increases come in the backdrop of the expiration of the so-called Bush tax cuts at the end of 2012. As noted already, it is possible that some of the tax increases that will otherwise occur might be addressed after the elections. Assuming no further changes in the tax laws, the table in this article compares current federal income tax rates that will occur, starting on January 1, 2013.


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