President Obama’s health care reform was recently signed into law and many Americans remain in the dark about how these sweeping changes will affect them. The changes are a mix of insurance regulations, tax credits and new programs with over $1 trillion in new spending, which trends higher over the next decade.
Without even involving the politics of this reform, most experts (including myself) agree that a direct result will be higher taxes to fund this initiative. Many of the changes are phased in over the next few years and some will even impact people later this year. You can expect that much of the burden will be placed on businesses, which will look to pass this cost onto employees and/or customers.
Here are some thoughts on how these new reforms may impact you and what changes need to be made:
The main goal of health care reform is to eventually have over 97 percent of American citizens insured. The impact and costs for the changes vary widely and taxpayers will pay for it with higher taxes in many forms.
It is highly likely that payroll taxes will increase for households over $250,000 income, higher capital gains taxes, and new limits on contributions to Flexible Spending Accounts (FSAs). Also, going forward businesses will be required to include the value of health care benefits they provide to employees on W-2s. This means that your new health coverage might bump you into a higher tax bracket.
Among the immediate benefits of this reform are that children under 26 years of age can now be covered under their parent’s plan as a dependant; households earning under $88,000 annually will be eligible for tax credits toward the cost of their insurance and the government will set up an insurance pool for high-risk individuals with preexisting conditions. Insurers will no longer be able to deny anyone coverage.
For investors, a potential trouble area could be the new challenges that await state and city governments. This could result in increased municipal issuance, causing rates to rise and impacting the credit rating of states and cities, further increasing borrowing costs. This domino effect may cause higher state income taxes.
There are a few steps you can take to lower your tax liability and keep more of what you make:
Maximize contributions to retirement plans such as a 401(k) or Roth or Traditional IRAs;
Leverage tax efficiencies and invest in municipal bonds, most of which offer tax-exempt income; Depending on an individual’s financial situation, a conversion to a Roth IRA may be an opportunity. The future savings can be significant by essentially pre-paying tax on IRA assets that will be taxed in future years at potentially higher rates;
Consider your asset location in addition to asset allocation. Consider holding bonds in retirement accounts and hold capital gains assets (stocks) in taxable accounts.
All Americans will be facing higher taxes, more regulation, and it will become more important than ever to have your financial advisor be in tune with the latest tax laws. Stay ahead of the curve and be ready to capitalize on opportunities and employ new strategies that protect and grow your wealth in the face of higher taxes.
Denis Horrigan is director with KR Wealth Management in Farmington. He has over 20 years experience as a financial advisor and can be reached at dhorrigan@krwealth.com or 860-678-6200.
