Industry News

Most annuity holders will duck Obamacare’s tax goose

President has lots of interest in interest income

Few make enough money to be hit by 3.8% surcharge; did insurers cry wolf?

Health care reform will hit investment income — including income from annuities — with a tax, but advisers and clients likely will continue using the products.
The Supreme Court’s 5-4 decision in favor of the Patient Protection and Affordable Care Act on Thursday will also put through a 3.8% tax, slugged the “unearned-income Medicare contribution,” on investment income. That includes income from interest, dividends, rent, annuities and royalties.
The surtax will apply to couples earning more than $250,000, as well as individuals who are earning more than $200,000.
Though the tax met fierce opposition from industry groups in the past, attorneys are saying that the 3.8% charge won’t hit as many annuity holders as once expected.
“While it’s unfortunate the 3.8% tax is there, in reality, it won’t make much of a difference,” said Joseph F. McKeever, partner at Davis & Harman LLP and expert on the taxation of insurance products. “There are very few people who own annuities and who have income over the $250,000 threshold.”

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A recent Gallup Inc. poll revealed that only 4% of nonqualified-annuity holders have adjusted gross income over the $250,000 mark, he added.
That finding sharply contrasts with the arguments from groups such as the American Council for Life Insurers, who signed a joint letter in 2010 arguing that the 3.8% tax “would serve as a disincentive to save in a product that uniquely allows an individual to accumulate retirement savings and to guarantee that savings can never be outlived.” Steve Brostoff, spokesman for the ACLI, said the group has no further comment on the recent court decision.
Financial advisers noted that despite the additional tax on income, they expect to continue using the products. “We use annuities as longevity insurance, so the tax ramifications are secondary to that,” said Kevin Distad, an adviser at Counsel Wealth Management Inc.
Still, the additional surtax could compound other problems for the wealthiest of clients.
“It’s going to be combined with the Bush-era tax cuts’ expiring, so someone in the top bracket of 35% could go up to at least 40%,” Mr. Distad noted. “That 3.8% tax on top of the marginal tax rate increasing could be significant, so it might be a good time to review your portfolios.”