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March 05, 2013 at 09:59 AM
There may be a boon in the Patient Protection and Affordable Care Act (PPACA) for the life insurance industry due to complexities for taxpayers under a new investment tax within it.
Whole life insurance policies –in fact, all insurance products including universal life policies, that provide for a tax free build up of cash surrender values –could become very attractive to investors, while annuities will likely be used more extensively under a tax mechanism in the health care reform law, according to the Congressional testimony of a tax academic today in Congress and a post-publication later clarification to NU that expanded the advantaged products beyond just whole life products.
Retirement accounts may also get a boon from the new tax, according to today’s testimony.
David Kautter, managing director of the nonpartisan Kogod Tax Center, of the American University’s Kogod School of Business, testified before the Subcommittee on Oversight of the Committee on Ways and Means on the tax provisions contained in PPACA.
The reason is the inside build up in the insurance products is neither included in Modified Adjusted Gross Income (MAGI) nor is it Net Investment Income (NII) subject to the 3.8 percent tax in the PPACA. In addition, death benefits are not included in MAGI nor is the NII subject to the tax either. Thus, life products with inside build up could now be more advantageous under the tax peculiarities of the PPACA compared to investments in dividend paying stocks and stocks that generate capital gains, according to Kautter.
Kautter, a former director of national tax for Ernst & Young, was speaking of an expectation of changing taxpayer behavior to deal with the NII.
Kautter focused his testimony on what he said were two of the most significant provisions in the Act on revenue and reach, the new Medicare tax on wages and the 3.8 percent tax on NII.
From a tax planning perspective, taxpayers will be focused on simultaneously managing two entirely new calculations in the Internal Revenue Code, he said. They are:
- The MAGI or “threshold planning;” and
- The NII.
The rate of the 3.8 percent tax is the lesser of an individual’s investment income for the taxable year or the excess of the MAGI over the threshold amount, which varies on income and status.
Trying to comply and work with the more complex implications of the NII could take hundreds of thousands of hours on the part of American taxpayers, Kautter predicts.
For starters, if a taxpayer will likely be under the threshold in a particular year, planning will focus on increasing NII to utilize the full amount of the threshold.
If a taxpayer will likely be over the threshold, planning will focus on minimizing NII for that year, he explained.
Thus, investments in whole life and municipal bonds that not only do not count in MAGI but do not count as NII will become very attractive, Kautter stated to the panel.
