More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
Taxes are, for a change, probably the easiest area to consider when assessing the implications of healthcare reform for advisors and their clients. To be sure, nothing in the massive bill is easy, but the main thrust of who gets taxed most is clear: high income and investment earners.
Starting in 2013, there's a 0.9% increase in Medicare payroll taxes for people earning more than $200,000 annually and for couples earning $250,000, plus a 3.8% surtax on investment income like dividends and capital gains.
"A married couple making $200,000 including investment income? They're safe," said Bernard Kiely, president of Kiely Capital Management, a RIA in Morristown, New Jersey. "But what happens when they start to take their required minimum distribution from their IRAs? The IRA distribution is not subject to the surtax but it could push other interest, dividends, and capital gains into the surtax."
In a keen bit of detective work, Kiely seems to have uncovered a morsel of good news from any potential surtax high earners might pay: counteracting the Alternative Minimum Tax.
"Most people I deal with are paying the Alternative Minimum Tax," Kiely said. "If their regular tax goes up, their AMT goes down an equal amount.
"If I'm paying $5,000 in AMT and I get a tax increase of $4,000, I'm now only paying $1,000 in AMT," Kiely continues. "So my tax bill doesn't change. And I have not seen that discussed anyplace."
As for new strategies advisors might follow with the implications of the healthcare surtax, Kiely thinks only a one-time adjustment is necessary.
"Taxable interest would be subject to this surtax. Municipal bond interest would not. So this is more of a reason to be investing in municipal bonds," Kiely said. "Dividend income would be subject to the surtax, capital gains would be subject to the surtax, so now when somebody is looking at appreciated stock there's another reason not to sell it because of the tax."
Investing Implications: Winners and Losers
When it comes to those investing sectors that stand to win or lose from healthcare reform, the biggest--and earliest--winner was the pharmaceutical industry, which negotiated a deal with the White House a year ago, before the reform debate boiled over. The big pharmaceutical companies, like Pfizer and Merck, struck a deal to cut their potential losses by promising not to fight reform while paying out $85 billion in savings and fees over 10 years. They also seem to have avoided their worst fear: government price controls.
David Kelly, managing director and chief market strategist at J.P. Morgan Funds, says that one of the main flaws of the legislation is that government spending will skyrocket. But stepping back from that very large negative, Kelly sees an opportunity for investors in pharmaceuticals.
"The main positive is this: We don't really think this is going to control spending," argues Kelly. "Take, for example, the prescription drug benefit part of the bill. The total pharmaceutical spending in the United States has been growing at a very rapid pace for many years, and if you throw more money at the problem you are not going to reduce the pace of spending. So filling up the 'doughnut hole,' however equitable it sounds on one level, isn't going to reduce total spending on pharmaceuticals."
So pharmaceutical firms, particularly those that make brand-name drugs, will benefit from the tens of billions of dollars the newly insured send to their companies. With the government closing that so-called "doughnut hole" in Medicare's drug program for the elderly by 2020, a surge of government-funded dollars will allow more of the elderly to afford the drug companies' more expensive drugs, which are the biggest drivers of profit for those firms.
As this wave of money and customers are unleashed into the healthcare system, Kelly sees other opportunities.
"If you increase the number of people that are eligible for medical insurance, you probably push up the total consumption of medical services, which will be something of a benefit for hospitals, though I expect a lot of battles about how much they get paid," Kelly said. "But overall I expect total healthcare spending to rise on hospitals, total healthcare spending to rise on pharmaceutical companies, and for medical device makers."
Insurance companies that helped support reform with millions of dollars in advertising and got beat up by the reformers anyway, should be happy with the bill because of all those extra customers coming their way. But a big caveat, according to Kelly, is the uncertainty.
"For insurance companies it's a really very complicated story, because one of the problems of this bill--and this is true for the whole thing but particularly for insurance companies--is that we don't know what the end game is here," Kelly said. "This is a bill, not constitutional law. And as various problems come up, we can expect to see all sorts of attempts to change it in various ways to hold down costs or to get various players to pay for more of the healthcare services being consumed. And it's very difficult to figure out from that who the winners and losers in the industry are going to be."