The Supreme Court’s decision to uphold the health care overhaul could have a broad impact on wealthy investors’ wallets with a new 3.8% increase on investment income.
The increase, which is one of the bill’s funding mechanisms, is set to take effect in January.
“The top rate on long-term gains is 15%. Next year, we know it’s going to go up by at least 3.8%,” says Tim Steffen, director of financial planning at Robert W. Baird & Co. “For higher income individuals and couples, their investments just became more expensive.”
That new rate, according to Steffen, will be imposed on the lesser of investment incomes or, for married couples, income of more than $250,000 ($200,000 for singles).
One impact of the impending tax hike is that investors may move to take their capital gains earlier than planned. With more than six months left under the 15% rate, advisors should speak with their clients about how to respond.
“What we’re cautioning people on is don’t let your buy and sell decisions be completely driven by tax rates,” Steffen says. “You have to look at this from an investment standpoint, not just a tax standpoint.”
Moreover, those conversations are also going to be influenced heavily by other upcoming events, including the November elections and the fate of the Bush-era tax cuts, which are set to expire at the end of the year.
“This is only the first leg of a three legged stool. The health care Act, Bush tax cuts and estate tax changes could all take effect in January. So these are significant, but there’s a lot more we’re keeping our eye on,” Steffen adds.
The Supreme Court decision comes with U.S. unemployment at 8.2%, while many companies remain cautious on hiring. The new legislation will mean additional taxes for companies in the health care sector, as well as taxes on high-cost employer plans.
The ruling will not reassure already cautious hiring managers, says Jim Allen, chief executive of Louisville, Ky.-based wealth management firm Hilliard Lyons.
“I think it’s going to just be another source of apprehension to corporate America,” Allen says. “I think it’s going to make corporations want to wait and see that the economy is clearly on firmer ground before they take those hiring steps.”
Scott Smallman, a senior vice president of investments out of Wedbush Securities’ Seattle office, says his clients are more focused on how tax policy will shape up at the end of the year rather than today’s Supreme Court decision.
Still, Smallman says he did field a few emails from politically conservative investors who were angered by the decision.
“My comment immediately to them was, ‘Hold on. Don’t get overwrought about it,’” and see what actual effect the law has, Smallman says. “The key message I tell everybody is just be calm and stay patient.”
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