The ink is barely dry on the health care bill but individuals should act now to prepare for major tax hikes and possibly higher interest rates, which could increase borrowing costs and require the need to reallocate some investment assets. That's the call from fee-only financial planner Rick Kahler, president of the largest financial planning firm in the seven-state Midwest region, Kahler Financial Group.
"Even though the bill is still a few years from implementation, it's not too soon to consider several financial planning strategies now to mitigate significant tax increases for the wealthy and the potential for increased borrowing costs for earners of all income levels," Kahler advises.
Strategy 1: High-income taxpayers should accelerate as much income into 2010 as possible. This will help offset the health care bill's 2013 Medicare payroll tax increase from 1.45 to 2.35 percent for single taxpayers earning more than $200,000 and couples earning over $250,000. Additionally, these same taxpayers will see a new 3.8 percent Medicare tax on investment income, including dividends, capital gains and rental.
Currently dividends and capital gains are taxed at 15 percent. But in 2011 dividends for high earnings increase to 39.6 percent and capital gains taxes rise to at least 20 percent. Add the new Medicare tax and rates climb to a maximum of 43.4 percent for dividends and 23.8 percent for capital gains.
Strategy 2: Taxpayers with high accumulated earnings in C-corporations should take earnings as dividends in 2010, and pay the 15 percent tax before it more than doubles in 2011 and practically triples in 2013.
Strategy 3: Taxpayers who own S-corporations should take as much as possible in salary and as little as possible in dividends to take advantage of the lower Medicare tax on salaries.
Strategy 4: "Some investors may want to shift from investments generating high dividends or interest to those generating tax-exempt or tax-deferred income, such as municipal bonds," Kahler says, "or investors should defer more income through employer-sponsored retirement plans or annuities."
Strategy 5: Kahler believes health care costs will exceed the bill's original estimate, which means the government could incur more debt to pay the higher costs. "That will put upward pressure on interest rates so individuals at all income levels should refinance any personal, mortgage, or business loans to fix the interest rate as long as possible," he says.
Strategy 6: Kahler also suggests investors reallocate some of their investments to assets that have little reliance on corporate profits, such as absolute return, commodities, cash equivalents, or managed futures.
"Other personal finance consequences individuals need to prepare for may include higher insurance premiums, policy restrictions, tax on the uninsured and extended coverage for children," Kahler predicts. "These are just a few of the financial planning issues I'm expecting from health care reform. More revisions are possible so it's important to pay attention during the upcoming months to plan for the impact health care reform is likely to have on our finances, businesses and lifestyles."
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