Healthcare Reform: Financial Planning Tips
Love it or hate it, what our government calls healthcare reform is now law. These are the financial planning implications you should consider in light of the changes:
Higher taxes: If you are single and making over $200K or married and making over $250K, watch out. Starting in 2013 people with these income levels are going to see their Medicare payroll tax increase from 1.45% to 2.35%. In addition, any investment income such as interest, dividends, capital gains and rental income will be subject to a 3.8% Medicare Tax. This tax is egregious as if you fall just one dollar above the stated income limits, ALL of this unearned income is subject to this Medicare tax, not the dollar amount over the limit.
Also be aware, the tax environment was already scheduled to get worse before the healthcare reform legislation was enacted. Next year the current tax bills “sunset” where qualified dividends will be taxed as ordinary income (from its current 15%) and long term capital gain rates will go to 20% (from its current 15%). So it may not seem like the new Medicare taxes are that costly, but the combination of this and the expired tax breaks may become very costly to some people. Think about it, some people will pay a 43.4% tax for dividends where they are paying 15% now.
If you are on the fringe of these income levels, you better plan now. For example, if you have investment property that you are considering selling that has a large capital gain, you may want to accelerate the sale into this year or at least by 2012 rather than waiting. You may want to begin repositioning any taxable investment accounts into more tax efficient holdings such as index funds, municipal bond funds or save more towards tax efficient IRA’s or employer sponsored retirement plans. If your situation dictates, you may want to consider converting a Traditional IRA to a Roth IRA if you have a taxable account that generates a lot of income now and is sufficient enough to cover the tax cost of the conversion. Not only could this lower the amount of unearned income that could be exposed to the new Medicare tax in the near term, converting it to a tax free Roth can reduce the chance you may be subject to the tax later in life. Finally, people who own C corps with high accumulated earnings may want to take a large dividend this year before the higher rates are imposed.
Now if you have a high deductible health insurance plan or are considering one, things will change here as well as the deductible will be limited to $2,000 for an individual and $4,000 per family. The lower deductible is most likely going to result in an increase in premiums. Current high deductible plans are grandfathered as long as they meet certain minimums so you may want to consider enrolling in a high deductible plan while you still can. It also would be advised to contribute as much as you can now to a health savings account.
Finally, if you decide not to carry health insurance, starting in 2016 you will pay a fine of $695 or 2.5% of income, whichever is greater. In 2018, if you pay premiums in excess of $8,500 for an individual and $23,000 for a family, then there is a 40% tax on the excess amounts.
The above just addresses planning aspects from an individual perspective. If you are a small business owner, there are a lot more planning implications that should be considered. But start planning now because all of the financial implications are right at our doorstep.