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What to Do About New Medicare Taxes: Kitces at FPA Conference

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Michael Kitces, Pinnacle Advisory Group’s managing director of research and AdvisorOne contributor, took the stage at FPA Experience 2012 on Monday in San Antonio to warn advisors of impending Medicare tax hikes and offer up solutions to help minimize their potential impact on clients.

“The new Medicare taxes will arrive in January of 2013,” he explained. “These are part of the health care overhaul bill and not a result of anything to do with the Bush tax cuts.”

This means, he added, that short of a 100% repeal of the law, the taxes will go into effect.

“Even if Republicans win big in November, they might repeal portions of the law here and there,” he argued. “But no one expects the entire law to be repealed, the increases are inevitable. They are certainly not going to repeal anything that increases government revenue.”

The new Medicare taxes will apply to earned income, including wages and self-employment, as well as unearned income, which mean dividends and capital gains. The increases will apply to individuals making more than $200,000 a year, or $250,000 for married couples. According to estimates from the Tax Policy Center, about 4 million households will initially be affected by the increase and in 10 years that number will more than double.

“As a result, it’s a new planning world when dealing with these taxes,” he continued. “It will be critical for advisors to apply avoidance and reduction strategies.”

The two major strategies he offered were 1) harvesting of capital gains prior to the end of 2012 and 2) if the client is a closely held C-corporation, harvesting dividends prior to the year’s end.

“The strategy should be centered on talking with clients now,” he said. “They might want to wait to see the outcome of the election before acting, and that’s fine, but you at least have to be prepared with scenarios with which to react. In that way you simply have to execute the plan. If you wait until mid-December to begin the conversation, the chosen strategy won’t happen by year’s end.”


Check out Michael Kitces’ latest blog, Do New Financial Planners Focus Too Much on a Partnership Career Track? Part 2, at AdvisorOne.

Check out in-depth coverage of FPA Experience 2012 at AdvisorOne.


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