How to Avoid the New Obamacare Tax

Posted by - Thursday, July 5th, 2012

The votes are in and the Supreme Court has officially decided to pass the Obama Healthcare Reform Act. If you've logged onto any social media site, listened to any talk radio shows, or have been reading the opinion columns in newspapers, you know this action has come under a great deal of scrutiny from constituents across the nation.

Investors especially have been on edge, waiting to hear what the Supreme Court would mandate in regards to the proposed 3.8 percent surtax on investment income. Then, last Thursday, investors and tax advisers heard that the new tax would affect those investors with an adjusted gross income of more than $250,000 OR $200,000 for single tax-payers.

That's right, more taxes on the “wealthy.” We've kissed the traditional notion of the “flat tax” goodbye.

Under the new law, the tax rates on long-term capital gains and dividends for individuals that fall into that category will spike up from a historic low of 15% up to 18.8%. This will take place on January 1, 2013.

According to the Wall Street Journal:

If, on the other hand, Congress allows the tax rates set in 2001 and 2003 to expire on Dec. 31—an unlikely scenario, according to many experts—the top rate on capital gains will rise to 23.8% and the top rate on dividends will nearly triple, to 43.4%.


The new levy is complex, but in effect it is a flat tax on investment income above the $250,000/$200,000 threshold. Note that while the tax applies only to investment income above the threshold, other income—such as wages or Social Security—can raise adjusted gross income, making investment income more vulnerable to the tax.

If you fall into this category, financial planners are advising clients to start “making moves to minimize the new levy” now before it's too late to avoid the extra tax.

A broker of middle-market businesses said entrepreneurs wanting to sell companies will probably move more quickly to action this year – due to the Supreme Court's recent announcement – so they can try to skirt that new 3.8% surtax.

There are certain assets where you may store your wealth that would leave you immune to this particular tax. One accountant in New York, Jonathan Horn, said municipal-bond income is ideal because it doesn't raise adjusted gross income nor is it subjected to the 3.8% tax.

Mr. Horn is also advising many of his clients to consider switching from a regular IRA into a a Roth IRA. Withdrawals in the Roth IRA are tax-free.

There are various other ways for older taxpayers to reduce their adjusted gross incomes as well. The WSJ gives an example of taking a large deduction from a business in order to lower their gross income.

Mr. Kautter with Kogod says that the new tax also applies to trusts and estates. Essentially, the 3.8 percent-rate applies to any net investment income equaling more than $120,000 that is not paid out to heirs or beneficiaries.

A lot of taxpayers are outraged by this new law that will cost them hundreds and thousands of dollars after the 2013 tax season. Meet with your accountant sometime soon to learn how you can compensate for the increase in investment tax.


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