The Patient Protection and Affordable Care Act of 2010 generated a fair amount of controversy before, during and after its passage.
While its impact is mainly felt throughout the country’s health care system, the reform package also includes a number of changes affecting financial advisors and their clients.
In terms of financial and tax issues, the act added a 0.9% Medicare surtax. The tax began in 2013 and continues into 2014, notes Chad Smith, a wealth management specialist with the broker-dealer HD Vest Financial Services in the greater Dallas area.
Clients with an adjusted gross income of $200,000 for individuals and $250,000 for couples are affected.
There’s not much planning that can be done to bring down such income levels or change the amount of the surtax, of course.
“But there are strategies that you can share with clients” around other issues in the acts, Smith said. “There really are some planning opportunities.”
These issues stem from the 3.8% additional Medicare tax on interest, dividends, capital gains, annuity income and income from other passive activities, such as income from rental properties, he explains, for those with gross income levels requiring payment of the 0.9% Medicare surtax.
“In 2014, this is likely to have more of an impact on clients and advisors, because of the rise in the market,” Smith said. “With the market increase, lots of mutual funds made end-of-year capital gains distributions, and dividends and capital gains went to investors.”
This could mean that some clients may be paying an additional 3.8% tax on top of their 15% or 20% capital gains, for instance.
“We had some shock from clients last year,” Smith explained. “And HD Vest advisors are proactively working with them to mitigate the taxes.”
It’s been over a decade since the Bush tax cuts, and advisors need to keep the tax implications of the Affordable Care Act in mind when building or tweaking portfolios, he adds.
For clients in the higher tax brackets, it may make more sense for them to invest in dividend-paying stocks in qualified plans going forward.
“You could allocation dividend-paying holdings into an IRA, and then the client might not have to pay the Medicare surtax on a year-over-year tax basis when they take out the assets in retirement,” Smith noted.
“You could compound the growth on a forward basis, and they may not pay as much on the dividends as they would if they’d held them in a non-qualified account,” he stated.