Will The 3.8 Percent Obama Care Surtax Apply To Me?

Who could get hit with the surtax? A successful business owner who has a good year in 2013 and ends up making over $200k who earns interest or dividends on his investment account. Or a couple with good salaries who both worked hard and get bonuses which put them over the $250k adjusted gross income mark in the same year they sell an investment property.  With the Affordable Care Act, they would both be hit with the surtax.

 

 While it is widely written that the Obama Care surtax doesn’t apply to the majority of people, if it does apply to you that means you have already paid high income taxes or capital gains taxes and now are going to be hit with an additional 3.8% tax on your net investment income.  It is hard enough these days to actually have an investment gain.  With interest rates so low to have actual investment income to report, this surtax is like pouring salt in the wound of people who have finally made a profit in a brutal economy.  You certainly don’t want to be caught off guard and be forced to pay additional taxes if you don’t have to.

While it is not in effect now it is right around the corner. The surtax will be in effect January 1, 2013 and applies to taxpayers with an adjusted gross income of over $250k ($200k if single).  This could be you if you have a high income and:

• You have investment income,
• You sell investment property and make a profit that is taxed as a capital gain,
• You sell your primary residence and have a capital gain — over and above the exclusion amount of $250K if single or $500k if married,
• You sell investments that incur significant capital gains.

What the tax includes:
A 3.8% tax on unearned income which includes interest, dividends, capital gains, annuities, rental income, etc. and applies to those with adjusted gross incomes is over $250k if married or $250k if single.  One thing to note is it is the lesser of net investment income or excess adjusted gross income over the threshold.

Here is an example:
If you are single and your adjusted gross income is $280,000, then the excess over $200,000 would be $80,000 ($280,000 minus $200,000). Assume for our example that your net investment income is $75,000. The new 3.8% tax applies to the smaller amount. In our example, $75,000 of net investment income is less than the $80,000 excess over the AGI threshold. So the 3.8% tax is applied to the $75,000 and you would have to pay an additional $2,850 for the Obama Care surtax.

If this applies to you then you have paid substantial income taxes already at that income level so if you want to avoid the surtax, here are some possible strategies:

1)      Don’t sell appreciated property or investments in 2013.  Sell by the end of the year in 2012 to avoid the surtax since it takes affect on January 1, 2013 or simply wait to sell.  Congress has a lot of work to do with the expiring Bush tax laws.  If you don’t need to, simply wait it out to see if that provision gets repealed.

2)      Do an exchange. If you were planning on selling real estate, do a 1031 exchange instead. Exchanging one like kind property for another does not incur a capital gain in the current year; your basis is transferred to the new property.  That said, it does not specifically state in the Obama Care law that the surtax does NOT apply to exchanges.  But since exchanges are not subject to capital gains taxes, it is reasonable that they would not be included. Consult your tax advisor for their opinion.

3)      Harvest your losses to reduce your capital gains. It was never more important to harvest any losses to reduce gains with the surtax.  If you do plan to sell securities in 2013, be sure to minimize your taxes by offsetting the capital gains by taking your capital losses in the same year.

4)      Defer income or gains in the year you sell.  Another way to avoid the surtax is to fall below the income threshold.  Some ways to do that are to max out pre-tax deductions in your 401(k), defer current income with deferred compensation, and delay your bonus (if your employer allows this) to 2014 instead of taking it in the current year.  Work with your tax advisor to determine ways to reduce your adjusted gross income in 2013.

5)      Reduce taxable dividend income. If your interest and dividend income is triggering the additional tax, shift your investments to tax exempt vehicles such as whole life or universal life insurance, or tax exempt municipal bonds. Cash value life insurance policies earn dividends and gains in the policy but aren’t reported each year on your tax return. You can borrow funds from the policy to withdraw tax free income or withdraw up to your basis.  It is only when you cash in the policy or take a withdrawal over and above your basis do you trigger income taxes. 

Tax exempt municipal bond interest is reported on your taxes but doesn’t add to your adjusted gross income unless you are subject to the alternative minimum tax and that’s another story. 

The surtax might not affect everyone but if it does affect you, it is a steep one. The fact is the surtax is a tax over and above the taxes you have already paid. It makes sense to avoid it if possible. It’s tough enough to earn a return these days – 1% on a CD and close to zero percent interest on Treasury Bills!  Paying an extra 3.8% in this investment environment is a tough sell.  This surtax is real and you should plan around it if you can.

Nancy L. Anderson, CFP ® is Resident Financial Planner at Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff Certified Financial Planner™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.

Financial Planning Can Be Scary For Investors

November 1, 2013 by Cyril Tuohy                 

Fear Factor?

Defunct television shows aside, advisors say that many people are paralyzed when it comes to financial planning.

But are people scared because they don’t have a financial plan? Or do they not bother making plans because they are scared?

“It’s a combination of both,” said Kenneth A. Moraif, senior advisor with Money Matters, a financial planning firm in the Southwest. “People are scared, and I think that’s a good percentage of people who have not created a financial plan. Another large percentage feels they don’t have enough money or are overwhelmed by bills.”

About 14 percent of respondents to a recent survey sponsored by Nationwide found that creating a plan is simply too overwhelming.

Investor fears, said Michael Spangler, president of Nationwide Funds, are “legitimate and overwhelming, which is why you get this set of responses.”

But where do advisors go from here?

Moraif’s counsel is for advisors to stop beating people over the head about how they are not saving enough.

“We’re taught in planner school to have clients do a budget and then see where you can cut,” he said in an interview with InsuranceNewsNet. “That’s a wasted exercise.”

Moraif said that slashing budgets one item at a time isn’t effective. He said that investors will spend on the goods that they want. He said that, instead of a what-can-you-go-without strategy, investors would be better off cutting down on the frequency and volume of certain purchases. Advisors can help investors formulate a strategy that is more proportionate to their income.

For example, they could choose to go to the movies three times a month instead of four.

Funnel the difference into a retirement account, even if it’s $100. “If you do less of it, you don’t notice as much when you cut back, then you build on that,” Moraif said. “Then you go from $100 to $200 a month. You start small.”

The Nationwide survey found that one of four respondents does not have a financial plan. Survey respondents raised the usual objections to not setting enough money aside: Their assets are too low and advisor fees are too high.

A separate survey by Wells Fargo found that 69 percent of Americans in their prime retirement savings period between 40 and 59 years old don’t have a financial plan. For some, the future no longer even includes retirement.

Those with a plan say they have saved a median of $63,000, or 32 percent of their goal, while whose without a plan have only saved a median of $20,000, or 10 percent of their goal, according to the Wells Fargo Middle Class Retirement study. Both those with a plan and those without one say they will need a median nest egg of $200,000 for retirement.

“This data so clearly shows what a difference a retirement plan makes, in that people who have a plan have saved three times those without a plan have saved,” Laurie Nordquist, chief of Wells Fargo Institutional Retirement and Trust, said in a statement.

Other surveys point to an enduring irony about finance and planning: the less people plan, the more scared they are; and the more scared they are, the lower the incentive to plan. A 2011 survey by Financial Engines, an investment advisory firm based in Palo Alto, Calif., found that fear about the financial future inhibits investors.

In an interview with InsuranceNewsNet, Spangler said advisors need to “acknowledge those fears are real and legitimate,” particularly in the wake of the financial crisis during which many investors saw an evaporation of wealth.

But much of the losses have recovered, and the stock market this year is way ahead of its long-term average.

Spangler said advisors should dispel the idea that advice necessarily costs a lot of money. Then they need to explain to investors’ what their likely future needs are going to be in “terms they can understand,” Spangler said.

Spangler said that fear and risk can’t be completely eliminated. But he also said that advisors should explain how they can lessen the impact of down markets and recover.

He said that the sooner advisors do that, the better off investors and their families are likely to be. The Nationwide survey found that there is time to make significant improvement in the management of assets and planning for retirement. Only 1 percent of those not working with an advisor said that it was too late to work with an advisor, the Nationwide survey found.

Lifetime income benefits propel indexed annuity sales

By Maria Wood

October 30, 2013 • Reprints

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When it comes to the feature that’s helped seal the deal most often in the past year, an overwhelming majority of fixed indexed annuity (FIA) sales pros cite guaranteed lifetime withdrawal benefits (GLWBs). Yet, looking toward the future, those same specialists say fixed indexed annuities that offer a combination of benefits will see a rise in sales.

Those findings came to light in a recent survey sponsored by Phoenix Companies Inc., which was conducted at the National Association of Fixed Annuities (NAFA) summit earlier this month. The firm canvassed more than 100 insurance marketing organization professionals, carrier executives and independent agents.

When asked what feature over the past 12 months was the “must have” ingredient for agents to sell an indexed annuity, 70 percent pointed to GLWBs, far ahead of the next most popular option, a choice of combination benefits (11 percent). Death benefit protection, principal preservation income riders, alternate index strategies or indices, premium bonuses and stacked roll-up riders each balloted at 6 percent or less.

Yet, when asked what feature or features would take on greater importance in the coming year, GLWBs still came out on top at 37 percent, but a combination of benefits moved up to 25 percent. Other popular choices included alternate index strategies or indices (11 percent) and principal preservation income riders (10 percent).

Mark Fitzgerald, national sales manager for Saybrus Partners, Phoenix’s distribution subsidiary, explained in a release detailing the survey results that while lifetime income remains a top priority for consumers and advisors alike, other preferences, such as accumulation and chronic-care benefits, are taking precedence as well, leading to the prediction that combination annuity products stand to increase in value.

What clients want
NAFA attendees were also polled on what their clients expressed a desire for when considering an annuity purchase, thereby shaping product design. Here again, the results nearly mirrored what the industry insiders voiced. The “need for guaranteed income in retirement” was picked by 62 percent of the respondents, followed by the “need to address multiple needs with one product,” cited by 24 percent. Third up was the “need to maximize their nest egg through accumulation products,” the choice of 10 percent.