With all the buzz around the fiscal cliff and the Bush tax cuts that are set to expire in 2013, what tends to get overlooked is a tax that will definitely take effect in the new year: the 3.8% tax on investment income.
Congress passed the 3.8% tax in 2010 to add an estimated $210 billion of funds into the Patient Protection and Affordable Care Act (PPACA) and Medicare overhaul, and the new tax is scheduled to go into effect on Jan. 1, 2013.
“We know this is meaningful, and it’s going to happen,” said Katie Nixon, chief investment officer in Northern Trust’s wealth management business, at a media briefing in New York.
As a result, advisors are getting their clients ready now for the inevitable and helping them decide whether to sell any assets before the end of the year. The challenge is getting clients to take action now.
Indeed, the level of resistance to taking action can be seen in Nationwide Financial’s recent survey showing that most affluent investors have no plans to meet with their advisors to discuss tax code changes even though the vast majority, 88%, said they are confident in their advisor’s ability to help them prepare for those changes.
“The 3.8% tax doesn’t relate to the fiscal cliff. It relates to Obamacare,” said Joseph Perry, a New York-based partner-in-charge of tax and services for Marcum LLP, an accounting and advisory firm.
“The key,” Perry added, “is for people to reach out now to their accountants and financial advisors to plan for the year-end to legally reduce the amount of taxes they would pay in order to put more money in their pocket. What we find at Marcum is that clients aren’t focused on the 3.8% tax. We’re recommending them to get their financial advisors involved and sometimes their attorneys.”
According to the congressional Health Care Caucus’ information site, the new tax will be imposed on unearned net investment income, including capital gains from stock sales, dividend income, bonds, mutual funds, annuities, loans and home sales. People subject to the tax are individual filers who earn adjustable gross income of more than $200,000 and married couples filing jointly with AGI of more than $250,000.
“In its simplest form, if you have a single person who receives $50,000 in interest income, that person will get taxed. The tax includes capital gains, but it doesn’t include salary, bonus, pension or IRA,” Perry said.
This article was originally posted at AdvisorOne.com, a sister site of Credit Union Times.