Healthcare decision means higher tax on dividends
The Supreme Court's decision touphold most of the Affordable Care Act means that high-income investors will pay a higher tax on dividends and some other investments starting next year. The largest of the new taxes is 3.8 percent on net investment income, which is defined as income from interest, dividends, annuities, rents and income derived from passive activity or the sale of property. It only applies to taxpayers with adjusted gross income in excess of $250,000 (married filing jointly) or $200,000 (single).
Taxpayers don't necessarily get a pass on income from IRAs, pensions, self employment, an active trade or business, or gains from selling an interest in a partnership or S corporation. Those items are excluded from net investment income, but would still appear within modified adjusted gross income.
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Now that this tax has apparently cleared remaining hurdles and should take effect next year, you should make sure you're planning accordingly so you don't get hit with a larger-than-necessary tax bill. This can be especially important if other tax changes scheduled to take effect at the beginning of the year -- such as the increase in capital gains rates from 15 percent to 20 percent and dividends being taxed at ordinary income rates instead of capital gains rates -- don't get changed.
Let's use dividends as an example. Currently, dividends are taxed at 15 percent. With the changes mentioned above, dividends would be taxed at 43.4 percent for those in the highest tax brackets.
These increases shouldn't cause you to avoid investing, but it should cause you to take note of their effects. Given the impact these taxes can have on your income and portfolio, planning for them now will help you stay ahead of the game and could mean significant tax savings. Some items to consider would be:
- Taking losses next year instead of this year
- Taking long-term gains this year if you know you'll be taking them in the next few years
- Whether you should continue to hold funds that have high dividend payouts