Now that Obama-care has been blessed by the Supreme Court, those couples with incomes over $250,00 a year and singles over $200,000 should be aware that your taxes could well be going up January first!
When Congress passed Obama-care in 2010, it added a new surtax. While we are waiting for conformation from the IRS, it is believed that the new tax applies to
- • Dividends
- • Rents
- • Royalties
- • Interest
- • Short and long-term capital gains
- • Taxable portion of annuity payments
- • Income from the sale of a principal home (above the exclusion),
- • Net gains from the sale of a second home
- • Passive income from real estate or investments
The new tax doesn’t apply to income from a regular or Roth IRA, 401(k) plan or pension, Social Security, life-insurance proceeds, municipal-bond interest, Schedule C income from businesses, or earned income on which you are paying self-employment tax.
As of Jan. 1, 2013, the tax rates on dividends for high-income earners will increase from their current historic low of 15% to 18.8% or 23.8% or higher if Congress does not extend the Bush Tax cuts.
What you should do now?
Consult with your tax professional now and verify if you will be impacted by the new tax. I made this recommendation to a client and her tax professional was unaware of the new surtax so ask the specific question. “Will I be impacted by the new Obama-care Tax and what should I do about it?”
The new 3.8% tax could make accelerating income into 2012 worthwhile. This would include those with a large stock concentration and had planned to sell over time and then diversify or anyone planning on selling their expensive home or investment property or even a business.
For those people who would not normally be impacted by the law but are planning to convert an IRA to a Roth IRA, they too should consult their tax professional about doing it in 2012 to avoid being impacted by the new tax later.
If there are assets in a trust with a separate Tax ID number and more than $12,000 of income, the new law applies as well. Therefore if there are assets in the trust with appreciation that you plan to sell in the near future, you may wish to sell in 2012 rather than 2013 since capital gains are not usually distributed as income to the beneficiaries and could be subjected to the added tax with in the trust.
If you are impacted by the new law and hold mutual funds invested in actively managed equities you may wish to liquidate these and reinvest in a passively managed diverse funds such as those offered by Dimensional Fund Advisor (DFA). These funds have below average turnover, which deceases capital gains. At the same time they have below average expense ratios (which is a whole other story).
Some investors may consider selling dividend generating investments and moving to tax-free investments since they will not impacted by the new law.
Starting in 2013, impacted investors will need to manage not only their adjusted gross income but also their investment income in order to avoid or minimize this tax.
THIS ARTICLE IS NOT PROVIDING TAX OR INVESTMENT ADVICE. CONSULT YOUR INVESTMENT PROFESSIONAL BEPOFE MAKING AN INVESTMENT CHANGE