Supreme Court upholds health care mandate as a tax
By Robert A. Green, CPA
I guessed it.
The Supreme Court reclassified the health care mandate as a tax, which is what many people said it was from the start. It was always going to be charged and collected on income tax returns. Had Chief Justice Roberts said it was unconstitutional, the whole bill would have collapsed and there would have been great disarray and wasted cost. President Obama didn’t sell it as a tax to avoid tax hike dissent and politics.
As tax preparers, we will have to deal with this health care tax on annual income tax returns. We deal with all sorts of taxes, and the list is growing, unfortunately. Income, FICA, Medicare and now health care taxes.
In addition to this health care tax, 2013 will bring the health care act's other tax — the Medicare Surtax, otherwise labeled the Medicare Hospital Insurance ("HI") tax. The Supreme Court left all the Act's tax provisions in place. This Medicare surcharge applies to wages and self-employment income in excess of $200,000/$250,000 (married couples). The surtax rate is 0.9 percent on top of the existing Medicare tax rate of 2.9 percent — a combined rate of 3.8 percent. Remember, unlike with FICA, Medicare taxes apply on unlimited earned income; there is no social security tax base of $110,100. (Click here for more information.)
There's a bombshell for our trader clients, too. For the first time in many decades, as part of the Affordable Care Act, Congress was able to break through the Chinese Wall to subject investment and passive income to this otherwise earned-income-related Medicare tax. That's bad news for our profitable trader and investor clients.
Like other tax hikes President Obama supports, this tax hike applies to higher-income folks. First, calculate adjusted gross income in excess of $200,000 (single) or $250,000 (married filing joint). Next, determine your total income from interest, dividends, capital gains, rents and passive income. The Medicare Surtax will apply to the lessor of these two calculations.
2013 is shaping up to be a year of great tax change and related uncertainty and disarray. In addition to these health-care taxes, the other big bombshell — the Bush-era tax cuts — is scheduled to expire at year end 2012. The estate tax is scheduled to come back with a vengeance, too.
All of these tax changes — AND TAX HIKES — will throw tax planning upside down. It's wise to consult with us about it before year-end.
To see the math on how tax rates will explode higher after expiration of the Bush-era tax cuts, see Green's 2012 Trader Tax Guide, Chapter 9 Tax Planning & Tax Law Changes.
Watch my latest video on why Congress should immediately extend the Bush-era tax cuts for everyone now. With tax reform promised in 2013, it's crazy to crash the tax code with sweeping changes from Bush-era tax cut expiration, only to change it again with major reform shortly thereafter.
What's the lesson? You can't keep making major changes last minute and causing great uncertainty. We all spend way too much time, effort and money dealing with change and it's counterproductive. That's probably why Judge Roberts took the easy way out — just call it a tax. May 10, 2012
Dangerous Precedents And Implications For Greece's Extreme Politics
By Robert A. Green, CPA
Forbes blog version: Dangerous Precedents And Implications For Greece's Extreme Politics.
One measure I follow closely is a universal financial-transaction tax (FTT). I consider this a proposal from the far left with little to no economic justification. FTTs will hurt growth, lead to contraction and shrink business, finance, jobs and tax revenues. It’s looting from the far left to pay for their excessive social causes.
If I’m right, these dangerous politics hint at the euro dropping against the other major currencies and more problems for European banks and industrial concerns. January 28, 2012
Blog Notes About Politics From Robert Green
By Robert A. Green
I apologize to anyone who is offended by the Republican slant in my blogs. I’d like to explain where this comes from. My neighbor and close friend in Connecticut — a passionate Democrat — once explained to his Democratic friends that I am a Republican for my business to advocate for lower taxes, but that personally, I’m an independent. I am open-minded and my thinking transcends partisan party lines. But my neighbor is right, I do advocate for lower taxes, which is my job as a CPA focused on tax savings for my clients.
As the leader of TradersAdvocacy.org and CEO of GreenTraderTax, I defend the lower-tax interests of traders, investors and investment managers. That means fighting off tax hikes like a potential financial-transaction tax (FTT), which could put active investors out of business, and working hard to retain lower tax rates on long-term capital gains taxes and qualifying dividends, carried interest for investment managers and lower 60/40 tax rates on futures.
In my recent blogs, I supported Gov. Romney’s tax returns, as they are typical for a successful global investment manager or private equity executive, but I also raised some lingering questions. In "Republicans And Democrats Dicker While The Deficit Yawns And Rome Burns,” I chastise Republican orthodoxy and the Grover Norquist tax-protection pledge applying to the expiration of the temporary Bush-era tax cuts and I also take Democrats to task over many spending issues. As my Forbes editor says, “There is no political officer on board here!”
Tax reform is on the table in Washington and many state capitals. The entire tax code is being dissected and analyzed, with many tax breaks being relabeled as tax loopholes and targeted for closure. The goal of tax reform is to lower tax rates for corporations and individuals alike, and to offset that with closing tax loopholes and special-interest tax breaks, thereby broadening the tax base, which hopefully will lead to growth in the economy and tax revenues, too.
My job is to focus on taxes and not spending, as other writers address spending. Each special-interest group will defend their own tax turf, but there aren’t many that defend the interests of the small-business trader, active investor and small investment manager. Big banks and big hedge funds have their own associations and lobbyists, but small traders don’t. Learn more about our efforts at TradersAdvocacy.org.
One thing is certain: Populist outrage is targeted against Wall Street, big banks and hedge funds. Often, that fury leads to tax hikes aimed at Wall Street, yet Wall Street often deflects those attacks, and the tax hikes fall on Main Street traders — our clients. That’s exactly the case with the financial-transaction tax.
I do not want to defend the interests of the 1% only, as many of our trader clients have incomes far lower.
If you are a Democrat, please read my blog with a grain of salt, and focus on the technicality of tax and regulatory policy that I am addressing. If you see a zinger once in a while, it’s part of my writing style to provoke thought and viewership on Forbes, and other media where my blogs appear.
I do not want to offend anyone; I just want to defend the interests of traders. Please share your thoughts and comments with me, as I value them very much.
January 26, 2012
The Buffett Rule is Bad Tax Policy, Keep Lower Long Term Capital Gains Rates
By Robert A. Green, CPA. Blog Notes About Politics From Robert Green.
Green's Forbes blog version: Buffett Rule Is Bad Tax Policy.
Mitt Romney’s tax returns have reignited discussion over the lower long-term capital gains tax rates.
The Buffett Rule
In his State of the Union speech, President Obama called for a new 30% minimum tax on taxpayers with income over a million dollars. Many wealthy Americans have significant investment portfolios, which sometimes generate a large amount of capital gains income taxed at the lower 15% tax rates. Many of these taxpayers have an effective tax rate close to 15% because they offset ordinary income with charitable tax deductions, avoiding alternative minimum taxes (AMT) of 28%, too.
The Buffett Rule Revised
Before President Obama opens the door to an attack on capital gains tax rates – which his minimum 30% “Buffett Rule” tax really does – he should first propose disallowance of charitable deductions against AMT on people making more than several million dollars per year. I’m not in favor of tax hikes, but the President should go this way first in his proposal. It’s not fair that AMT, which was originally passed to tax the super wealthy, now mostly snags people with upper-middle-class incomes. Reform AMT first.
Heck, why not even consider (in jest) a Democratic AMT, so rich Democrats can pay more to fund the bigger government they demand? Why did Mr. Buffett pledge half his net worth, most to Bill Gates’ charitable foundation, and justify it by saying he doesn’t trust government to spend his money wisely?
Double dip vs. double taxation
Let’s compare double-dip charity tax breaks vs. double taxation on dividends and capital gains.
Mr. Buffett receives a double-dip tax break when he donates his appreciated shares in Berkshire Hathaway to the Bill & Melinda Gates Foundation. His first million-dollar tax break each year is the charitable tax deduction at the appreciated value – limited to 30% of his income with the rest carried over — against both regular taxes and AMT taxes. His second even bigger tax break is exemption from capital gains taxes on the shares he transfers – effectively sells — to the charitable foundation. Learn more in my blog on Buffett’s tax benefits.
Now compare that double-dip tax break to the double-taxation paid on dividends, and in some cases, capital gains, too. When a taxpayer receives a dividend, taxes are often first paid on the corporate level, perhaps at 35%, and a second time on the individual level at either 15% for qualifying dividends or up to 35% for ordinary dividends. Do the math and the double tax rate can be as high as 57.75% and that’s just federal. It’s no wonder companies like Apple don’t want to pay dividends and they arrange profits offshore. We need tax reform — lower corporate rates, NOT tax hikes from President Obama.
Does Gov. Romney pay double taxation?
As Gov. Romney took heat in explaining his tax returns this past week (see my blog), he and conservative-leaning pundits defended lower capital gains tax rates, arguing that it’s effectively double taxation. While this argument is correct in general, it’s not always the case.
Take the case of Mitt Romney. Private-equity firms may acquire or invest in turnarounds and startups, and use debt to fund their targets, so the target companies may generate operating losses, rather than profits in the initial years. In some cases, private equity investors structure their deals to pass-through operating losses, benefiting at 35% rates. Later, they rebuild the companies and sell them for a profit, and pay 15% long-term capital gains rates. So, the standard defense may not be the case for private equity and Romney’s situation.
Why should interest be tax-preferred over dividends?
Consider how dividends relate to interest income. In the case of investing in companies, corporations can’t deduct dividends, whereas they do deduct interest expenses, which favors debt over equity. That’s proven to be bad tax policy since it contributed to excessive leverage and unsustainable debt levels, which are now crippling the economy today, as many deleverage.
For an investor, interest income and qualifying dividends shouldn’t be taxed as ordinary income tax rates up to 35%. It’s fair for interest income to be taxed up to 35%, since it’s deducted by corporations saving tax at 35% corporate rates, or even other individuals saving taxes at up to 35% individual rates. So, it’s a wash in the case of interest income and expense. By the way, this is another reason to keep corporate and individual tax rates the same. If you lower corporate rates to 25%, lower them for individuals to 25%, too.
Conversely, when corporations pay ordinary and qualifying dividends, they aren’t tax deductible, so the corporation still has to pay the 35% rate. When the investor pays taxes on dividends, it’s double taxation. In these cases, some could argue that dividends shouldn’t be taxed at all. Perhaps a 15% double taxation rate is reasonable, considering that it’s not double taxation in every instance and the rate isn’t too high. But, shouldn’t ordinary dividends also receive the lower tax rates? Otherwise, Congress should allow corporations to deduct dividends in the same manner they can deduct interest expenses to level the tax and financing playing field.
Keep lower capital gains and qualifying dividend tax rates at 15%. If Democrats propose hiking tax rates for the super rich, be very leery as they could expand that to others next.
Tax hikes on dividends and capital gains will depress growth
I hope Congress and the President will think twice about raising taxes on dividends and long-term capital gains and disallowing interest expenses. Tax hikes on financing could cripple growth, and that’s what is needed most at this juncture in our fragile recovery. Europe is attacking finance and passing anti-growth austerity measures, it could plunge them into severe recession and further crisis. The U.S. can’t afford those types of mistakes and Gov. Romney is absolutely correct about all this, too.
The Bush tax cuts expire this year, raising taxes on dividends and capital gains
Caution, the qualifying dividend tax rate of 15% will expire at the end of 2012, so qualifying dividends will be taxed at the ordinary rate, which is headed higher, too. According to the Tax Policy Center report “Tax Rates on Capital Gains,” “the expiration of the Bush-era tax cuts and imposition of taxes associated with the 2010 healthcare legislation will boost the maximum tax rate on gains to 25 percent in 2013.”
Year-end tax planning
Get your dividends and long-term capital gains at lower rates in 2012 before these tax rates head higher in 2013. Will tax-rate selling affect the markets in Q4?
If the President wants billionaires like Mr. Buffett to pay more taxes, he should ask his friend to give the government more money, rather than fork over half his net worth to charity. President Obama needs to close the tax loophole for the double-dip charity tax break. Dividends are already double taxed, so don’t triple tax them and depress growth.