A distraught listener left me his name and concerns over ObamaCare, so I spent some time with my CPA talking about the impact of ObamaCare on the tax side and found out that he was already doing tax planning on my behalf to prepare for the impact.
Next year there is a 3.8 percent surtax on investment income over $250,000 per married couple from ObamaCare. If you had a $300,000 Adjusted Gross Income (AGI) and $200,000 of it came from earned income and $100,000 from investment income, you will pay a 3.8 percent ObamaCare tax on $50,000. The tax is due on investment income once your AGI exceeds $250,000. Mitt Romney made $13.7 million last year so on that income he would owe $511,000 of ObamaCare tax.
Essentially, ObamaCare raised Mitt Romney's low tax rate by 3.8 percent so no wonder Mitt wants to repeal it! I went to the Wall Street Journal's interactive income ranking application on their website and plugged in $250,000 to see where that tax increase hits as a percentage of American incomes. It says that only 4 percent of Americans earn $250,000 or more, so with one exception that I will talk about later, the ObamaCare tax is primarily paid by 4 percent of wealthy taxpayers.
If your AGI is under $250,000 you would pay no ObamaCare tax on investment income. If you received cash rent from farmland, you would pay 3.8 percent ObamaCare tax on the amount that the cash rent income pushed your total income above the $250,000 threshold. You would have to own and cash rent out over 800 acres of good Corn Belt farmland at $300/acre before you would have enough investment income to owe any ObamaCare tax. The ObamaCare tax will also apply to capital gains income, so if you sold a farm for a big gain, there would be a 3.8 percent ObamaCare tax liability on that gain above the $250,000 AGI threshold. So if you sold a farm for a $1,000,000 gain and your other income was $250,000, you would owe a $38,000 ObamaCare tax on the sale. The ObamaCare tax is only levied on investment or capital gains income above the $250,000 threshold so it, therefore, becomes important how your income is grouped.
My accountant had already grouped my income, active with passive, in order to minimize my potential tax liability exposure to the ObamaCare tax. I would thank the listener who called me, as it was not something on my radar and also thank my CPA, as he was on the money. He told me that the projected tax income from this ObamaCare investment income tax will fall short of estimates, because tax planners will elect income grouping selections to minimize or avoid it. He said that the same thing happened when they limited the interest deduction to home mortgages. That is when second home mortgages proliferated. They would borrow against a home to buy a car so the interest was deductible. That deduction took a lot more out of the U.S. Treasury than was intended.
In some cases, such as large capital gains, you will not be able to avoid it but as the ObamaCare taxes apply to investment incomes above $250,000, just a very small percentage of tax payers will have a liability to it. On the earned income side, the Medicare payroll tax paid by the self-employed, including farmers, is going up from 2.9 to 3.8 percent also on incomes above $250,000. It would appear that lower class incomes benefit most from ObamaCare provisions while upper income taxpayers get the bill. The one exception to that is the cap on Flexible Spending Accounts (FSA), which allow payroll withholding to be diverted tax free for use for medical expenses or child care, that will be lowered from $6,000 to $2,500. That would hit everyone who uses payroll FSAs, not just those with high incomes. It could cost taxpayers who were using FSAs to the full $6,000 cap as much as $1,155 in lost tax savings. There are other liabilities created as private insurers react to the healthcare law that are too lengthy to go into.
I think that the odds of repealing ObamaCare, while impacted by the election, are slim to none, so the focus should be on managing around the tax liability where possible. ObamaCare proponents have argued that the public didn't like ObamaCare because many of the benefits hadn't kicked in yet. Well ... the tax liabilities hadn't either, so there will be a mixed reception when many meet with their tax planners. Millions of people will reap benefits, but somebody is paying the bill and there will be some very unhappy taxpayers, like the listener who left me the message that may have elevated blood pressure next year as a result of it.
David Kruse is president of CommStock Investments,Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet. CommStock Investments is a registered CTA, as well as an introducing brokerage.