It’s an Odd Time to be a Tax Professional

We like concrete rules. We look at

the absolutes and tell you what the

tax implications are for purchases,

investments and major financial

decisions. In 2014, however, we are

entering uncharted territory with

Obamacare and all the tax

implications it leaves in its wake.

It’s a weird feeling when I find

myself talking to someone over 65, telling them that if they need to get their knee

replaced that they really should do it now. Your doctor is supposed to tell you when to

get your knee replaced, but I know that if you do it now you will achieve significant

tax savings.

In practice, the Affordable Care Act has proved to be anything but affordable. You

can prepare for the continuing roll out of Obamacare in three steps:

Step one: Go talk with your tax professional. Several parts of Obamacare have a direct

impact on investors over 65, most importantly the 3.8 percent Medicare surtax on net

investment income, if your adjusted gross income is over a certain threshold. Older

Americans typically have bigger investment accounts, because they’ve spent their

whole lives working and saving. Starting in 2013, Obamacare takes 3.8 percent off the

top of the investments and dividends working Americans planned to live on in

retirement.

For example, your IRA will be taxed on net investment income, which means some of

the money you were counting on will go to the IRS instead of providing for you in

retirement. You can minimize that amount by taking more out of Social Security,

which isn’t taxed, and less from your IRA. Even if your tax situation seems simple to

you, you need to take advantage of all the available deductions to retain as much of

your hard-earned money as possible.

Step two: Find out your health insurance costs. Americans need to go to the

Affordable Care Act health exchange and figure out what their health care will cost

them. To date, health insurance premiums have gone up, not down. Young, healthy

Americans have not flocked to Obamacare as predicted, and health-care providers

have responded with high premiums.

In the past, taxpayers have been able to itemize their medical expenses and deduct any

medical care that exceeded 7.5 percent of gross adjusted income. This is especially

important to seniors in assisted living and retirement facilities who could deduct

medical-related expenses from their care and reduce their tax liability. Obamacare

raises that threshold to 10 percent, now for people under age 65 and in a few years for

those over age 65, meaning it will take more medical bills to be able to benefit from

deductions on your 2017 taxes.

Additionally, medical devices are going to face a new 2.3 percent tax in 2014, levied

on the manufacturer or importer of the device. As with most manufactured goods,

increases in costs eventually get passed on to the consumer. Dental implants, dentures,

hip and knee replacements are expected to be part of the as-yet-unreleased medical-

device list.

Finally, by 2018, so-called “Cadillac” plans for medical insurance will be hit by a 40

percent excise tax, targeting individuals with premium health care plans—with an

annual cost of $10,200 for an individual or $27,500 for an employee and

spouse/family coverage. The Obamacare logic holds that plans with low deductibles

encourage unnecessary testing and excess health spending, and the tax will offset

those inefficiencies.

Step three: Calculate a new projection for how much money you will need to add to

your current savings to retire. As we learn the rules and implications of Obamacare,

we are able to calculate the increase in taxes and medical costs shouldered by

Americans. Americans will need more money to retire than ever before—maybe

you’ll need to work longer or start socking away money in retirement accounts and

savings earlier.

As tax professionals, we are here to offer you the tax guidance you need to have a

secure retirement. You may want to look into that knee replacement sooner, rather

than later.

Paul Oman Article originally posted at Kris Miller Money Maestro™ blog.