What does the Supreme Court's ruling mean for our clients?
On Thursday, June 28, the U.S. Supreme Court upheld the key provisions of the Affordable Care Act (aka ObamaCare), with Chief Justice Roberts siding with the court’s liberal minority, deciding that the mandate to purchase health care is a tax that Congress can impose.
While President Obama and his advisors took great pains during the 2008 campaign with a promise not to raise taxes on the middle class, the Justice Department argued before the Supreme Court that it was in fact a tax. The Supreme Court then sided with the administration in a split, 5-4 decision.
While I won’t get into the political implications
of this outcome, I am reminded of the adage stating that “Winners celebrate and losers mobilize.” I also note that Mitt Romney received $4.6 million in campaign donations within 24 hours of the ruling.
But what does the ruling mean for our clients?
First, the Supreme Court’s ruling means that the 3.8 percent surtax on investment income is for real. This means that beginning on January 1, 2013, for joint filers with adjusted gross income (AGI) over $250,000 ($200,000 for single filers), dividends, capital gains, rents, royalties, interest and some annuity payout income will be taxed an extra 3.8 percent. This extra tax does not affect retirement account payouts (i.e. IRAs), Social Security benefits, pension payments, municipal-bond interest, veterans benefits and life insurance proceeds.
For those who are looking to defer and/or avoid additional taxes, life insurance and annuities are even better financial vehicles. Also note that this 3.8 percent tax applies to trusts and estates on net investment income of approximately $12,000 that isn’t paid out to heirs or beneficiaries.
Second, high earners will now have an extra, and somewhat progressive, payroll tax. Currently, the Medicare tax is a flat 1.45 percent for all earned income. For wages and self-employment income above $250,000 ($200,000 single), the tax will increase by 0.9 percent to 2.35 percent. The new tax has no deductible component for self-employed taxpayers and need not be withheld by employers.
Third, this could mean some hardship for some small business owners. Businesses that employ more than 50 employees must provide health insurance coverage or pay a penalty. What does this do to an employer whose business is growing, currently does not provide health insurance benefits and has just under 50 employees and it seems that they will hold off as long as possible from hiring that 50th employee to avoid providing health insurance. Is this a job killer? Some business owners may view it this way.
Lastly, we still don’t know what will happen after the Bush tax cuts, the 2 percent payroll tax holiday or the estate and gift tax exemption and tax rates which are all set to expire on December 31, 2012. If these tax cuts, exemptions and rates are not extended, all taxpayers will be paying more, which may push the U.S. back into a recession
What does this mean for our business? While small business owners with more than 50 employees will now be mandated to provide health insurance coverage, and though this may or may not contribute to the continued instability in this marketplace, I still believe we have a tremendous opportunity for the protection, accumulation and guarantees we provide within our contracts.
What better way is there to accumulate on a tax-deferred basis than with life insurance and annuities
? And if you think annuity rates are low, they still offer guaranteed rates that can be more than double the average 5-year CD rates1
Immediate and guaranteed income payout annuities can further lessen the tax impact to your clients by utilizing exclusion ratios, while life insurance can provide tax-free income. There is no better time to discuss the benefits that are offered by the products you provide.
1 5-year average CD rate of 1.42 percent (www.bankrate.com) versus top 5-year multiyear guarantee annuity effective rate of 2.9 percent, 7/2/12.