Keebler Analysis. Credit for this summary alert goes to Bob Keebler, a Wisconsin CPA who advises affluent clients throughout the country. Bob has analyzed the important income tax provisions of the 2010 Health Care Bill and has posted his narrative on our Leimberg estate planning listserve. This is a synopsis of his presentation. I have to confess that I have not read the new health care bill. As passed, it will have an impact on affluent clients, meaning singles with income over $200,000 and married couples with income over $250,000, the "Threshold" amounts.
Medicare Surtax. The 2010 Bill establishes a 3.8% Medicare Tax on passive net investment income in excess of the threshold amounts. This newsletter will attempt to summarize Bob Keebler's analysis of the new Surtax.
The 2010 Health Care Bill establishes a third tier of income tax calculations. We are familiar with the first two tiers, the regular tax calculation and the AMT (Alternative Minimum Tax). We now have a third tier, Surtax calculation, for higher income tax payers. Also, it is important to remember that the Bush tax cuts expire in 2010. Therefore, the highest marginal effective tax rates are likely to increase from 35% to 43.4%, effective January, 2013.
Investment income would normally be royalties, dividends, interest, and capital gains. The new tax will be levied on "passive" investment income as opposed to "active" investment income, a distinction which has been present in the Code for many years. An example of this distinction would be a landlord who actively manages rental properties vs. rental income from partnerships, or income from oil and gas investments, where the taxpayer is not "active" in management.
Modified Adjusted Gross Income. The measuring rod for the Surtax will be Modified Adjusted Gross Income ("MAGI"). MAGI will include capital gains and all other income, including pensions, deferred compensation, etc.
It is important to note that distributions from qualified retirement plans are not subject to the Surtax. However, taxable distributions will push up MAGI so that other passive investment income, becomes subject to the tax.
Two Important Points. With increasing rates ahead for high income taxpayers, Keebler makes two important points for them and their counselors:
1. Death in 2010. For taxpayers dying in 2010, prior to November 30, representatives should choose a fiscal year ended November 30 to achieve maximum avoidance of increased tax rates, particularly the Surtax. Under special provisions of the Internal Revenue Code, estates and revocable trusts can elect fiscal years other than the year ended December 31. This is a commonly used tax deferral technique, which will now help avoid some of the rate increases and Surtax.
2. Roth Conversions. We have written previously about the advantages of Roth conversions in 2010. We see increased publicity for this technique in the financial press. The new Surtax makes Roth conversions in 2010 look even more attractive. The distribution from a regular retirement plan will be taxable in 2010. However, the 2010 tax rate appears to be much lower than affluent taxpayers will face in future years, especially those higher income taxpayers who will be facing the large increase in the top bracket.
Conclusion. Many professionals have not yet had an opportunity to analyze the impact of the new Health Care Bill on client taxes. Suffice it to say that if you advise higher income clients or if any reader fits this category, be alert to these changes. Make sure that you, or your client, sit down with a financial planner or CPA, to analyze the potential impact that the bill will have after 2010 and consider what steps you can take this year to minimize your potential tax exposure in the future.
We get involved with estate and trust administration which will have potential impacts under the new legislation. Roth conversions also impact estate planning by beneficiary designations, etc. If you have questions regarding any of the above, please contact James R. Modrall III or Thomas A. Pezzetti, Jr. or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.
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