Last week Obamacare (formally known as the Patient Protection and Affordable Care Act – PPACA for short) was deemed legal by the U.S. Supreme Court. Without question, it is the law of the land, and as investors or entrepreneurs we should prepare for its ramifications. The roll out of this law will happen, and there’s nothing in its way to prevent it. At least the uncertainty is finally out of the way.
So instead of living in a fantasy world where this law doesn’t exist, we need to determine the causes and possible effects. The question you should be asking yourself is: “How will this law affect me?” Plenty! Here’s the rundown of the changes and the ramifications. Now is the time to prepare and act.
Small Business Owners
Right now, the Medicare tax on salary and/or self-employment (SE) income is 2.9%. As a business owner you pay both sides of this tax. Most employees are not aware with the Medicare tax you pay half, your employeer pays the other half. Even in a lone employee/owner company, you still pay for both.
The increase in January 1st 2013 will target many business owners. You’ll pay an additional 0.9% of income in excess of $200,000 annually if filing single. The threshold amount is $250,000 for a married couple filing jointly (threshold applies to joint compensation of the two spouses), or $125,000 for a married person filing separately. At these rates, this new tax applies to most small business owners.
In 2014 if your company has 50 employees or more, you’ll be required to offer health care. If you do not, you must pay a fine (sorry U.S Supreme Court; I mean a tax).
Starting January 1st 2013, a Medicare tax of 3.8% will apply to unearned income. Specifically the lesser of net investment income or the amount by which adjusted gross income exceeds $200,000 ($250,000 for a married couple filing jointly; $125,000 for a married person filing separately).
In my opinion, this is the most drastic change in the tax law next year and will cause the biggest behavior changes with investors. This is because of this new tax and the more than likely tax expiration of Bush/Obama’s tax cuts. It’s theoretically possible the top rate on capital gains will rise to 23.8%, and the top rate on dividends will move to 43.4%.
There’s a reason why the media is calling it “taxmageddon”, which I believe is aptly named.
While tax rates themselves aren’t at the peak of our country’s history, it is a time when the U.S. economy is fragile (to put it nicely), and percentage wise it is a dramatic increase to our existing tax rates. Anyone who states this is a minor change is fooling themselves.
This tax affects income such as real estate rental income or other passive investment activities.
Taxes affect behavior, even if they were unintended by government officials. Obamacare’s regulations and taxes will definitely change small business and investor behavior.
Companies Drop Healthcare
Since the penalties in many cases are lower than paying directly for a company health care plan, it is expected many companies will drop employee health care.
Small Business Size
Small businesses, once they get close to that magical fifty employees, may decide not to grow further or outsource business to other companies. The other option is split into separate companies with less than fifty employees. This will be a disincentive to hire new employees and further increase the gap between small businesses and large businesses. This certainly won’t help current unemployment issues in the U.S.A.
Boon for Accountants and Tax Preparers
I don’t have to worry about my accountant going out of business. With the additional rules, regulations, and taxes, accountants will be in much higher demand.
It might make sense to sell investments in which you’ve experienced a huge amount of capital gains this year instead of next. This could even include your primary residence or a business you own. It could be even said dividend stocks in a taxable portfolio have a bullseye on their back. It might make sense since dividend rates are currently expected to increase as well.
Higher Rent Rates
If you are a renter expect higher rents next year. After all, landlords are not going to keep a property at a loss or affect their profit margin because of this new tax.
Increase in Tax differed or Tax Exempt Investments
If you aren’t investing tax efficiently, now is the time to do so.
Tax differed or tax exempt investments will increase in the next year. This includes investments such as MLPs and muni bonds. This could even include US I-Bonds since interest accrual is differed until you cash out the bond. Not only investors currently searching for yield with these investments, but also for tax reasons. It’s currently a crowded trade and will get worse.
Boon for Healthcare Stocks
Since now most individuals must have private healthcare, in general this will be great for healthcare stocks. This includes healthcare providers, drug manufacturers, and pharmacies.
Readers: Are there are any other ramifications I’ve missed? If so add, add a comment.