We at Paragon Financial Advisors are not accountants and urge you to verify any items we discuss with your tax professional to determine its implications in your particular situation. We also do not believe you should “let the tax tail wag the investment dog.” That is, your investing should not be dependent solely on tax considerations. However, tax consequences certainly should be considered when all other things are equal. Taxes can have a significant impact on your total economic well-being. It is in that spirit that we discuss the Congressional resolution that provided the Health Care Act (sometimes called “Obamacare.”).

One of the Congressional leaders advised that “…we should pass the bill so we can see what’s in it…” and she was absolutely right—it has some tax implications on investments that are worth noting. In our third quarter of 2012 newsletter, we mentioned some of the provisions of this law. We will summarize some of the more investment related impacts again here:
  • There is a 3.8% Medicare surtax on “net investment income” beginning in 2013. This surtax affects taxpayers with a modified adjusted gross income of $200K for singles or $250K for couples.
  • It affects interest, dividends, capital gains, annuity income, rental income, and royalties. Business income from “passive” activities is also affected.
  • Interest income from municipal bonds is excluded.
  • Retirement plan distributions are not subject to the surtax; however, such retirement plan distributions can increase a taxpayer’s income over the threshold levels.
  • There is an additional payroll tax of 0.9% on workers earning more than $200K for singles or $250K for couples.
So what happened with all these changes? The top tax bracket went from 35% to over 43.4% (39.6% + 3.8% for health care + the phase out of deductions—see our previous blog). Capital gains tax rates went from 15% to 23.8% (20% for capital gains + 3.8% for health care –a whopping 59% increase in the tax rate). Oh, and by the way, not all of the health care costs are being included yet—some don’t become effective until 2014!!

As always, please feel free to contact us here at Paragon Financial Advisors if you have questions about providing for your long term financial security.


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