Financial planners and accountants are in for a busy year or two if President Barack Obama gets his way on the budget and a health care reform bill.
Financial planners and accountants are in for a busy year or two if President Barack Obama gets his way on the budget and a health care reform bill. While many of the tax changes in the president's budget have been debated for
some time, his health insurance reform bill, announced last week, has a nasty surprise for financial planners and their high-income clients. Couples earning more than $250,000 a year will find their investment income subject to a 2.9% Medicare tax. That is, any income from “interest, dividends, annuities, royalties and rents” would be subject to the tax. Investment income presently is exempt from the Medicare tax.
It wasn't clear from the summary of the health care reform proposal released by the White House whether income from state and municipal bonds, previously tax-exempt, would also be subject to this tax.
If it is, muni bonds will become a less inviting investment. If it isn't, tax-exempt bonds become even more attractive investments.
This proposal comes on top of tax changes that have been proposed for high-income earners. Congress will likely allow the Bush administration tax cuts to expire for couples who earn more than $250,000 a year, meaning that the top income tax rate will rise to 39.6%, from 35%, and the second-highest rate will rise to 35%, from 33%.
Further, the budget proposes to reduce the itemized deduction write-off for couples who earn more than $250,000 a year, raising their effective tax rates. In addition, without congressional action, the estate tax in 2011 reverts to 2001 levels — a 55% maximum rate after the first $1 million, which is exempt.
No doubt, when Congress gets through with debating the health care reform bill and the president's budget, some of these provisions will be changed in detail, though probably not eliminated. This process will complicate further the already complex tax code and make the lives of high-income taxpayers and their financial advisers more difficult.
The changes above don't address the tax modifications that the health care reform bill and the budget impose on businesses, such as the annual $2,000 fee per employee on businesses that employ more than 50 workers that don't offer health insurance, and the taxes and fees levied on the health insurance companies, drug companies and medical-device makers.
A key question: What will be the impact on the economy of all of these tax changes?
Generally, when you tax something, you get less of it. The tax on the investment income of wealthy individuals no doubt will affect their investing behavior in some way — and is likely to reduce the revenue that the tax is projected to bring in.
Another obvious effect would be a reduction in the growth of employment at companies with 50 or fewer employees. Owners of low-margin businesses who fear that they can't afford health insurance may slow their hiring so as not to reach the threshold for paying the $2,000-per-employee fee.
Accountants, planners and investment advisers would be well-advised to pay even closer attention than usual as the budget and health care reform bills wind their way through Congress. Even more surprises may be in store, and they will have to be prepared to deal with clients' reactions when they discover the implications for their taxes and finances.
