The Tax Bomb Is Coming

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The Tax Bomb Is Coming

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July 02, 2012

It would be hard for me not to make some comment on the 5-4 decision last week in the Supreme Court upholding Obamacare. (Affordable Care Act and Health Care and Education Reconciliation Act of 2010). If you put your political affiliations to the side albeit a very hard thing to do, as a nation we are still mired in a 1.3 trillion dollar year fiscal budget deficit and a massive growing cancer of federal debt. I've written in my column the last 3.5 years numerous times about the tax cloud that is looming over all of us to create more revenue to solve our problems. For the current President or any future one to say they won't raise taxes at all is simply a promise that cannot be kept.

In fact, in a 2009 interview with George Stephanopoulos (www.abcnews.go.com) here is a snippet of what Obama told George. OBAMA: No, tha-tha-that's not true, George. Eh, for us to say that you've gotta take a responsibility to get health insurance is absolutely not a tax increase. What it's saying is that we're not gonna have other people carrying your burdens for you, any more than the fact that right now everybody in America, just about, has to get auto insurance. Nobody considers that a tax increase. People say to themselves, "That is a fair way to make sure that if you hit my car, that I'm not covering all the costs." Three years later . . . the largest tax increase in the history of the world.

If you've forgotten after three years what's embedded currently in Obama care along with the Bush tax cuts expiring at the end of this year, think about what will be coming to a movie theater located down the street from you showing soon. It's called 'The Great American Tax Bomb' and here's the storyline (this is not a complete list, but I think you'll get the plot):

  • 3.8% Medicare Tax On Investment Income

Beginning January 1, 2013, the federal government will impose a 3.8% "Medicare" tax on investment income of higher income taxpayers with an adjusted gross income ("AGI") in excess of $250,000 for joint filers and $200,000 for single filers. The new Medicare tax will be calculated in a convoluted manner: The tax is computed as 3.8% of the lesser of (1) investment income or (2) the excess of AGI over the income threshold amount ($250,000 for joint filers and $200,000 for single filers). This also includes capital gains as well so automatically with no capital gain rate change it would move to 18.8% which is over a 20% increase in tax liability on capital gains.

  • .9% Medicare Tax On Ordinary Income

Currently, the payroll portion of an employee's social security tax is 1.45% up to the first $106,800 of ordinary income (wages). Beginning January 1, 2013, the federal government will impose an additional .9% "Medicare" tax on ordinary income of higher income taxpayers with an AGI in excess of $250,000 for joint filers and $200,000 for single filers. The new .9% tax will be assessed only on the "employee" portion of Medicare, i.e. the employer will not be required to make a matching contribution of this additional tax. There's been no mention of social security tax increasing, but I wouldn't be surprised to see the 6.2% tax be included on all of the income for some higher dollar amount of income earned whether it be $250,000, $500,000, or $1,000,000.

  • Flexible Spending Limited On Cafeteria Plans (Flexible Spending/Medical Savings Accounts)

Starting in January 2013, the maximum you can contribute to your FSA will be $2,500. In addition, the "use it or lose it" feature of FSAs means you won't be able to carry any 2012 excess remaining in your account into 2013 (unless your plan provides a 2½ month grace period for using prior-year funds). You should make sure you schedule all of your medical electives for the second half of 2012. What's most interesting on this one is that it's really the 'middle class who will get hit hardest by this and they were the ones who weren't supposed to see any tax hike. It will cost a middle class family $500 to $750 dollars to lose this $5,000 total deduction if they were maxing it out yearly.

  • Increase Limitations To The Medical Expenses On Itemized Deductions AND Phaseouts Returning To Itemized Deductions and Personal Exemptions

Do you itemize your deductions every year? If you do, you could potentially claim a deduction on your federal income tax for qualified medical expenses in excess of 7.5% of your adjusted gross income (AGI). Beginning 2013, if you are under the age of 65, your medical expenses will have to exceed 10% of your AGI to be deductible. Also, REMEMBER that at a minimum we are likely to see the reinstatement of itemized deduction and personal exemption phaseouts coming back in 2013.

  • Tax For Not Carrying Health Insurance-

In 2014, the minimum tax owed by those without insurance is $95. It rises to $325 in 2015 and $695 in 2016 - dependents under age 18 will owe half. The minimum amount per family is capped at triple the per-person tax. The annual tax could be more, however, because it is the greater of the flat-dollar amount or a percentage of taxable income above someone's tax-filing threshold.

In the Supreme Court ruling, Chief Justice John Roberts said someone making $35,000 a year in 2016 is expected to owe the IRS about $720. Someone earning $100,000 would owe about $2,400.

Roberts wrote in the decision: "Those subject to the individual mandate may lawfully forgo health insurance and pay higher taxes, or buy health insurance and pay lower taxes. The only thing they may not lawfully do is not buy health insurance and not pay the resulting tax." (source: www.mlive.com)

I thought I would share five of the highlights of what will be coming down the road. My comments don't include the impact on businesses that more than 50 employees, that dividend rates could go as high as 43.4% for individuals which will absolutely change the way they plan their finances, and countless number of excise/haircut taxes there are on special programs or higher level limits. Lurking in the distance? Realize that it is being required to report to you how much your employer spends each year on your health insurance which in my mind would be a nice preamble to ultimately taxing you on that benefit as well.

What's funny to me about all of this is that the bill is called the Affordable Care Act which is the beginning storyline to this movie. The thick of the plot and the ultimate conclusion of this movie will carry a soundtrack cut by Paul Simon called 50 Ways To Tax Your Lover. I've said it before and I'll say it again. You can't cut expenses fast enough to cure our ills. Thus, you must raise revenue. With the Supreme Courts decision (if not overturned), theaters open in January and your price of admission just went up!

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services

Visit to www.oxygenfinancial.net to request a free consultation with the leading financial experts for people in their 20's, 30's, and 40's in the country.

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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

This site is published for residents of the United States only. Registered Representatives of Kestra IS and Investment Advisor Representatives of Kestra AS may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact Kestra IS Compliance Department at 844-553-7872.

PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. Kestra IS and Kestra AS makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is Kestra IS and Kestra AS liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.