Why is this Topic Important to Wealth Managers? This topic discusses the Recovery Act spending and its effects on the national economy.  It provides wealth managers with indicators and information to help clients better understand the use of government (taxpayer) funds and their allocation as a result of the financial crisis and ensuing financial recovery.

The American Recovery and Reinvestment Act of 2009, enacted February 2009,[1] was designed to put Americans back to work and combat the largest downturn in the economy since the Great Depression.  Through the Recovery Act, Congress allocated funds in three ways.  The single largest part of the Act —more than one-third of it, or $288 billion— was tax cuts.  Ninety-five percent of taxpayers have seen taxes go down as a result of the Act. [2]

The second-largest part or $244 billion — just under a third — was direct relief to state governments and individuals. This funding helped state governments avoid laying off teachers, firefighters and police officers and prevented states’ budget gaps from growing wider. On an individual level, the Act ensured those hardest hit by the recession received extended unemployment insurance, health coverage, and food assistance.

The remaining third or $275 billion of the Recovery Act financed the largest investment in roads since the creation of the Interstate Highway system; construction projects at military bases, ports, bridges and tunnels; overdue Superfund cleanups; clean energy projects; improvements in outdated rural water systems; upgrades to overburdened mass transit and rail systems; and much more.

The $787 billion (in total) economic Recovery plan included provisions, in sum, designed to (1) create and save jobs, (2) spur economic activity and invest in long-term economic growth, and (3) foster unprecedented levels of accountability and transparency in government spending.

The Recovery Act was intended to provide a short-term jump start to the economy, but many of the projects funded by Recovery money, especially infrastructure improvements, are expected to benefit economic growth for many years. Thus, the Recovery Act’s longer-term economic investment goals include:

• Initiating a process to computerize health records to reduce medical errors and save on health-care costs
• Investing in the domestic renewable energy industry
• Weatherizing 75 percent of federal buildings and more than one million homes
• Increasing college affordability for seven million students by funding a shortfall in Pell Grants, raising the maximum grant level by $500, and providing a higher education tax cut to nearly four million students
• Cutting taxes for 129 million working households by providing an $800 “Making Work Pay” tax credit
• Expanding the Child Tax Credit [3]

Has the Recovery Act worked?

When the Recovery Act passed, the economy was in “freefall”.  In the fourth quarter of 2008, real gross domestic product plummeted by an annual rate of 6.8 percent. In the first quarter of 2009, the economy lost more than 2 million jobs. The ranks of the unemployed were increasing and the speed of job loss was also accelerating.

Since the passage of the Recovery Act, indicators show this trend has turned around. Two years ago, the country was losing 780,000 jobs per month; now, the government states that the private sector has added jobs for 11 straight months, for a total of more than a million new jobs in 2010.

The trend in GDP growth shows a similar reversal after the passage of the Recovery Act.  GDP was contracting at a rapid pace in late 2008—its fastest rate in decades—but it experienced a sharp turnaround following the passage of Recovery Act, leading to six quarters of growth.  Whether this current growth correlates to the tax relief and spending provided by the Recovery Act, or a part of it, will be debated through the 2012 election cycle.

Tomorrow’s blogticle will continue to discuss new and exciting planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

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[1] Public Law: 111-5.

[2] See generally “A New Way of Doing Business: How the Recovery Act is Leading the Way to 21^st Century Government.”  February 2011. http://www.whitehouse.gov/sites/default/files/new_way_of_doing_business.pdf. Last Accessed 2/28/2011.

[3] The Recovery Act”. http://www.recovery.gov/About/Pages/The_Act.aspx. Last Accessed 2/28/2011.

Why is this Topic Important to Wealth Managers?   A wealth manager should be able to present Advanced Market Intelligence on the long-term economic impact of government spending and its ability to raise revenues with clients.

The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession, which was triggered by a large decline in house prices and a financial crisis—events unlike anything this country has seen since the Great Depression.

For the federal government, the sharply lower revenues and elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years. The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and  8.9 percent of the nation’s output, respectively. [1]

Also, the recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the employment of workers who have lost their job. Payroll employment, which declined by 7.3 million during the recent recession, gained a mere 70,000 jobs (or 0.06 percent), on net, between June 2009 and December 2010. [2]

However, under current law, CBO projects, budget deficits will drop markedly over the next few years—to $1.1 trillion in 2012, $704 billion in 2013, and $533 billion in 2014. Relative to the size of the economy, those deficits represent 7.0 percent of GDP in 2012, 4.3 percent in 2013, and 3.1 percent in 2014. From 2015 through 2021, the deficits in the baseline projections range from 2.9 percent to 3.4 percent of GDP. [3]

Nevertheless, the deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly$9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP. [4]

With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade. CBO projects that the government’s annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.

Beyond the 10-year projection period (though 2012), further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending as a percentage of GDP well above that in recent decades. Specifically, spending on the government’s major mandatory health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and health insurance subsidies to be provided through insurance exchanges—along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years. [5] If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt.

Next week’s blogticles will discuss relevant topics for wealth managers in 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

 

NB: This work or parts thereof originated from previous official Federal Government publication available to the public.

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[1] See generally Congressional Budget Office. “The Budget and Economic Outlook: Fiscal Years 2011 to 2021”.  January 2010.  http://www.cbo.gov/ftpdocs/120xx/doc12039/SummaryforWeb.pdf.  Last Accessed 2/17/2010.

[2] Id.

[3] See generally Office of Management And Budget. “Budget of the U.S. Government Fiscal Year 2012”-Summary Tables.  http://www.whitehouse.gov/omb/budget/Overview.  Last Accessed 2/16/2011.

[4] Congressional Budget Office. “The Budget and Economic Outlook: Fiscal Years 2011 to 2021”.  January 2010

[5] See Congressional Budget Office, The Long-Term Budget Outlook (June 2010), revised August 2010.

Why is this Topic Important to Wealth Managers? Clients will often ask for your “take” on the annual federal budget.   It is important to show the client a command of the the facts and figures before addressing the political perspective of spending and revenue.  Any producer can “mime” someone else’s perspective.  Distinguish yourself with a command of the underlying numbers.  Thus, this week Advanced Market Intelligence presents the facts and figures of the proposed federal budget for fiscal year 2012. 

The new 2012 Federal Budget was released today by the President.  Below is a summary of the inflows and outflows concerning next year’s proposed budget (in billions of dollars).

Outlays:

Appropriated (“discretionary”) programs:   Security $ 884/Non-security 456; Subtotal—appropriated programs: 1,340

Mandatory programs: Social Security $ 761, Medicare 485, Medicaid 269, Troubled Asset Relief Program (TARP) 13, Other mandatory programs 612; Subtotal, mandatory programs 2,140, Net interest 242, Disaster costs 8

Total outlays 3,819

Receipts:

Individual income taxes $ 1,141, Corporation income taxes 329

Social insurance and retirement receipts: Social Security payroll taxes 659,Medicare payroll taxes 201, Unemployment insurance 57, Other retirement 8, Excise taxes 103, Estate and gift taxes 14, Customs duties 30, Deposits of earnings, Federal Reserve System 66,Other miscellaneous receipts 20

Total receipts 2,627

2012 Deficit $ 1,101

Here are some noted observations of the current budget: 

• By 2020 individual income taxes will more than double from their 2012 levels of 1,141 to 2,439 billion. 
• The Proposed corporate tax rates increased from 2011 to 2012 to over 60% from 198 billion to over 329 billion (the budget notes that The President is calling on the Congress to work with the Administration on corporate tax reform that would simplify the system, eliminate these special interest loopholes, level the playing field, and use the savings to lower the corporate tax rate for the first time in 25 years—and do so without adding a dime to our deficit.)
• By 2020 the annual interest owed will balloon to over $729 billion, or an increase of over 300% from the 242 billion 2012 levels. 
• The cost of Medicaid will more than double by 2020 as compared to 2012 levels. 
• The estimated deficit for 2020 is 735, which means the overall national debt by year end 2020 is estimated to be over 21.5 trillion dollars. 

The Department of Defense and Department of Homeland Security together make up the largest spending area in the budget.  Here’s a list of some of the highlights the security spending provides for. 

• The allocated amount reflects the continued investment in national security priorities such as cybersecurity, satellites, and nuclear security.
• Maintains ready forces and continues efforts to rebalance military forces to focus on both today’s wars as well as potential future conflicts.
• Enhances the Administration’s commitment to maintaining a reliable nuclear deterrent by increasing investments in the nuclear weapons complex and in weapon delivery technologies, and to nonproliferation by preventing the spread of nuclear materials around the world.
• Refocuses funding for border surveillance on technologies that have proven to work, allowing for a tailored approach in different border regions instead of the previous one-size-fits-all approach.
• Safeguards the Nation’s transportation systems with an $82 million increase to support deployment of up to 1,275 Advanced Imaging Technology screening machines at airport checkpoints, with robust, built-in privacy safeguards.

Tomorrow’s blogticle will continue with discussion on the national budget. 

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

Why is this Topic Important to Wealth Managers? Presents discussion on the national debt and national future financial outlook.  A client wants to know what YOU think about Treasury Notes versus other types of government debt, even foreign government debt.  An understanding of the annual federal national deficit, and its impact on the federal national debt, will provide you a helpful starting point to educate your client, without providing investment advice.

Today’s release of the new federal budget has us at Advanced Markets excited.  We thought an introduction to the current economic condition would therefore be appropriate.  As of September 30, 2010, the federal debt managed by Bureau of the Public Debt totaled about $13,551 billion primarily for borrowings to fund the federal government’s operations.  A Government Accountability Office (GAO) Study recently showed the Federal Debt balances consisted of approximately (1) $9,023 billion as of September 30, 2010, of debt held by the public and (2) $4,528 billion as of September 30, 2010 of intragovernmental debt holdings. [1]

Debt held by the public primarily represents the amount the federal government has borrowed to finance cumulative cash deficits.  To finance a cash deficit, the federal government borrows from the public.  When a cash surplus occurs, the annual excess funds can then be used to reduce debt held by the public.  In other words, annual cash deficits or surpluses generally approximate the annual net change in the amount of federal government borrowing from the public.

Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds, that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.

The federal debt has been audited since fiscal year 1997. Over this period, total federal debt has increased by 151 percent.  During the last 4 fiscal years, managing the federal debt has been a challenge, as evidenced by the growth of total federal debt by $5,058 billion, or 60 percent, from $8,493 billion as of September 30, 2006, to $13,551 billion as of September 30, 2010.

The increase to the federal debt became particularly acute with the onset of the recession in December 2007. Reduced federal revenues and federal government actions in response to both the financial market crisis and the economic downturn added significantly to the federal government’s borrowing needs.  And, due to the persistent effects of the recession, experts believe federal financing needs remain high.  As a result, the increases to total federal debt over the past three fiscal years represent the largest dollar increases over a three year period in history.  The largest annual dollar increase occurred in fiscal year 2009 when total federal debt increased by $1,887 billion.

During fiscal year 2010, total federal debt increased by $1,653 billion.  Of the fiscal year 2010 increase, about $1,471 billion was from the increase in debt held by the public and about $182 billion was from the increase in intragovernmental debt holdings.

During fiscal years 2008, 2009, and 2010, legislation was enacted to raise the statutory debt limit on five different occasions.  During this period, the statutory debt limit went from $9,815 billion to its current level of $14,294 billion, an increase of about 46 percent.

Recovery from the economic downturn is expected to be slow during the next few years and as a result, deficits are expected to remain high.  The Congressional Budget Office (CBO) estimates the annual federal deficit will be just over $1 trillion for fiscal year 2011, down from $1.3 trillion for fiscal year 2010.  Correspondingly, debt held by the public is expected to grow from an estimated 62.5 percent of gross domestic product (GDP) at the end of fiscal year 2010 to over 66 percent of GDP at the end of fiscal year 2011. The real challenge is not this year’s deficit or even next year’s; it is how best to address the nation’s unsustainable long-term fiscal path over the coming decades.

While considerable attention has been understandably given to the near- term fiscal position, the federal government faces even larger fiscal challenges that will persist long after the return to economic growth.  The budget and economic implications of the baby boom generation’s retirement have already become a factor in near-term budget projections and will only intensify as the baby boomers age.  Since fiscal year 2008, the Medicare Hospital Insurance program has paid more in benefits than it receives in cash from payroll taxes.

In addition, for the first time in over 25 years, the Social Security program, which has historically run large cash surpluses that helped reduce the need to borrow to finance other federal government activities, paid more in benefits than it received in tax income in fiscal year 2010 thereby contributing to borrowing needs.

GAO and CBO’s long-range fiscal policy simulations continue to show that, absent significant changes in policy, the federal government’s fiscal condition over the coming decades is on an unsustainable path.  The sooner action is taken to address this long-term fiscal challenge, the less disruptive and destabilizing the changes will be.  As a result, the nation’s leaders face the challenge of dealing with current economic and financial issues in the context of the need to address the long-term fiscal challenges.

Tomorrow’s Advanced Markets Intelligence blogticle will continue with discussion on the national budget in order to provide you intelligence talking points when asked about the national debt beyond the generic that you may glean from news media.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

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[1] The full study may be obtained by linking to: http://www.gao.gov/new.items/d1152.pdf.  Last Accessed 2/13/2011.

Why is this Topic Important to Wealth Managers? Discusses the repeal of the health care legislation. Also, presents discussion about budgetary concerns regarding repeal.

One of the most exciting aspects of working in the wealth management industry is the need to adapt to constant change.  Over the past 12 months, the Legislator has created a fair amount of change that has been the topic of many discussions here at Advanced Markets FX and FYI.  Amusingly enough, we now examine how some of that could change yet again, starting with the Health Care Repeal.

Recently the House of Representatives passed the Repealing the Job-Killing Health Care Law Act, as introduced on January 5, 2011, which is now up for a Senate vote. That bill would repeal the Patient Protection and Affordable Care Act (PPACA) [1] and the provisions of the Health Care and Education Reconciliation Act of 2010 [2] that are related to health care.  Both of those laws were enacted in March 2010, and have been discussed in depth throughout the past year.

Among other things, PPACA and the provisions of the Reconciliation Act that are related to health care will do the following: establish a mandate for most legal residents of the United States to obtain health insurance; create insurance exchanges through which certain individuals and families will receive federal subsidies to substantially reduce the cost of purchasing health insurance coverage; expand eligibility for Medicaid; reduce the growth of Medicare’s payment rates for most services (relative to the growth rates projected under prior law); impose an excise tax on certain health insurance plans with relatively high premiums; impose certain taxes on individuals and families with relatively high incomes; and make various other changes to the federal tax code, Medicare, Medicaid, and other programs.

The Congressional Budget Office (CBO) has reviewed H.R. 2, and the financial affects its passage could have. [3] Although the findings are initial, the CBO first noted that the health care legislation contained a set of provisions designed to expand health insurance coverage, which CBO and Joint Committee on Taxation estimated would have a gross cost of about $930 billion and a net cost (after accounting for certain related changes in outlays and revenues) of about $780 billion over the 2012–2019 period. Repealing that legislation would eliminate such costs.

Secondly, the PPACA and the Reconciliation Act also included a number of provisions to reduce federal outlays and to increase federal revenues (mostly by increasing the Hospital Insurance payroll tax and imposing fees on certain manufacturers and insurers); in March, CBO and JCT estimated that those provisions unrelated to insurance coverage would, on balance, reduce direct spending by about $500 billion and increase revenues by about $410 billion over the

2012–2019 period.  The main variance the CBO estimates for the 2012-2019 period is $130 billion which is a result of projected increases of about $520 billion in revenues and about $390 billion in outlays.

Further, CBO’s estimates project repeal of the health care legislation would probably reduce the appropriations needed by the Internal Revenue Service by between $5 billion and $10 billion over 10 years. Similar savings would accrue to the Department of Health and Human Services.

Tomorrow’s blogticle will discuss 2011 market opportunities for wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Public Law 111-148.

[2] Public Law 111-152.

[3] Douglas W. Elmendor, Director.  Congressional Budget Office.  Letter to the House Majority Leader.   http://www.cbo.gov/ftpdocs/120xx/doc12040/01-06-PPACA_Repeal.pdf.  January 6, 2011.  Last accessed January 22, 2010.

We’re just two weeks into the new Congress and the Republican majority is already causing controversy as it tries to live up to what it perceives as its deficit reduction, tax cut mandate. Republicans promised to cut spending by $100 billion by the end of 2011, but critics say that recent Republican maneuvers will do just the opposite by reducing revenue through new tax cuts and a repeal of the health care reform law.  

The so-called “cut as you go” rules require that every new mandatory spending measure be offset by an equivalent spending cut. Tax cut legislation is exempt from the cut-go rules.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Why is this Topic Important to Wealth Managers? Discusses the Small Business Tax Credit as enacted by the Health Care Legislation.  Provides an overview of important information concerning small businesses and the use of the tax credit.

During 2010, President Obama realized his goal of providing health care coverage to all Americans when Congress passed the Patient Protection and Affordable Care Act, [1] and the Health Care and Education Reconciliation Act of 2010.[2]

Under the new health care legislation many new changes will affect taxpayers beginning last year.  This week’s blogticles are dedicated to the discussion of the health care legislation and the impact it is projected to have.  We begin with a discussion of the Small Business Tax Credit.

Under the new law, the Small Business Tax Credit allows qualified small employers to elect, beginning in 2010 a tax credit for some percentage of their employee health care coverage expenses.  Generally, a “qualified small employer” is an employer who has the equivalent of 25 full-time workers or less (e.g., a firm with fewer than 50 half-time workers would be eligible), pay average annual wages below $50,000, and cover at least 50 percent of the cost of health care coverage for their workers.[3]

Further, the tax credit will cover up to 35 percent of the premiums a small business pays to cover its workers until 2014, when the rate will increase to 50 percent.  Nevertheless, the credit has phase out provisions which gradually reduce the credit amount for businesses with average wages between $25,000 and $50,000 and for businesses with the equivalent of between 10 and 25 full-time workers.

The United States Department of Health and Human Services Estimates that up to 4 million small businesses are eligible for tax credits to “help them provide insurance benefits to their workers.” [4]

The incentive behind the tax credit appears to be two-fold.  First, The Congressional Budget Office estimates that the tax credit will save small businesses $40 billion by 2019.  Secondly, small businesses face “extraordinary challenges in providing affordable health coverage to employees, “including premiums that are 18 percent higher on average than large businesses pay for the same coverage.” [5]

Estimates also show that small businesses have 3 to 4 times as much administrative cost built into premiums than as compared to the large group market.  In addition, small businesses are also considered to be at a disadvantage in negotiating with insurance companies because they lack significant bargaining power. [6]

For detailed guidance on the Small Business Tax Credit see Internal Revenue Service Notice 2010-44. [7] The guidance clarifies, in part, that small businesses can receive the credit not only for traditional health insurance coverage but also for add-on dental, vision, and other limited-scope coverage.

Tomorrow’s blogticle will continue the discussion on the health care legislation.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Pub. L. No. 111-148.

[2] Pub. L. No. 111-152.

[3] See generally, Patient Protection and Affordable Care Act Sec. 1421, as modified by section 10105.

[4] http://www.healthcare.gov/law/about/order/byyear.html.  Last Accessed 1/2/2011.

[5] Id.

[6] Administration Releases New Guidance On Small Business Health Care Tax Credit.  http://www.whitehouse.gov/sites/default/files/rss_viewer/health_reform_small_business_guidance.pdf.  May 17, 2010.  Last Accessed 1/2/2011.

[7] Internal Revenue Service.  Section 45R – Tax Credit for Employee Health Insurance Expenses of Small Employers Notice 2010-4.  http://www.irs.gov/pub/irs-drop/n-10-44.pdf.  Last Accessed 1/2/2011.

Why is this Topic Important to Wealth Managers?  Presents discussion on the Alternative Minimum Tax Exemptions that wealthy clients may consider in the calculation of his or her tax liability, generally, as high income earners.

“For more than three decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax that was originally intended to impose taxes on high-income individuals who have no liability under the regular income tax.” [1]

Current law imposes an alternative minimum tax (AMT) only on individuals.  “The stated purpose of the alternative minimum tax (AMT) is to keep taxpayers with high incomes from paying little or no income tax by taking advantage of various preferences in the tax code.” [2]

The parallel tax structure to the regular income tax law requires individuals “to recalculate their taxes under alternative rules that include certain forms of income exempt from regular tax and that do not allow specific exemptions, deductions, and other preferences.” [3]

Generally, the AMT is an amount that is the excess of the “tentative minimum tax” over the regular income tax.

Tentative minimum tax is equal to the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 percent of the remaining taxable excess, which is essentially an individual’s taxable income adjusted to take into account certain specified preferences and adjustments (also known as alternative minimum taxable income (“AMTI”)) minus the exemption amount.

In addition, the maximum tax rates on net capital gain and dividends used in computing the regular tax are used in computing the tentative minimum tax.

The Obama Tax Cuts extend the exemption amount beginning in 2010.  The exemption amounts for this year are (1) $72,450, in the case of married individuals filing a joint return and surviving spouses; (2) $47,450 in the case of other unmarried individuals; and (3) $36,225 in the case of married individuals filing separate returns.

Starting in 2011, the individual AMT exemption amounts are (1) $74,450, in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of other unmarried individuals; and (3) $37,225 in the case of married individuals filing separate returns.

In addition, certain nonrefundable personal credits may be used to reduce the taxpayer’s traditional tax liability as well as his or her AMT tax liability.[4] These personal credits include, dependent care credit, the credit for the elderly and disabled, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain nonbusiness energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehicles, and the D.C. first-time homebuyer credit.

Since its initiation, “the AMT has affected few taxpayers, less than 1 percent in any year before 2000, but its impact is expected to grow rapidly in coming years and affect about one-fifth of all taxpayers in 2010.” [5] Furthermore, the Internal Revenue Service’s National Taxpayer Advocate, Nina Olson, labeled the AMT “the most serious problem faced by taxpayers.” [6]

For further discussion on the calculation of the AMT see generally, AdvisorFX: How is the alternative minimum tax calculated.

Tomorrow’s blog will continue to discuss pertinent provisions of the new Tax Cuts and how they relate to wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Congressional Budget Office.  Revenue and Tax Policy Brief.  A series of issue summaries from the Congressional Budget Office No. 4, April 15, 2004.  “The Alternative Minimum Tax”.  http://www.cbo.gov/doc.cfm?index=5386&type=0.  Last Accessed 12/27/2010.

[2] Congressional Budget Office. Revenue and Tax Policy Brief (April 15, 2004).

[3] Id.

[4] 26 U.S.C. 26(a).

[5] Congressional Budget Office. Revenue and Tax Policy Brief (April 15, 2004).

[6] Internal Revenue Service.   National Taxpayer Advocate 2003 Annual Report to Congress at 5.  December 31, 2003.

is this Topic Important to Wealth Managers? Reviews the National Health Care Legislation’s revenues and expense provisions.  Discusses one area in particular where high income earners are subject to additional tax liability provided by the new law.

There are many new questions being raised by the national health care legislation that was passed into law earlier this year.  The Patient Protection and Affordable Care Act, [1] and the, Health Care and Education Reconciliation Act of 2010, [2] created a number of significant changes to the landscape of the health care system in the United States.  The total cost of the program, is estimated at approximately $356 Billion dollars over the ten year period from 2010-2019. [3] However, revenue projections from taxes incorporated into the legislation are actually estimated upwards of $437 Billion dollars over that same ten year period. [4]

Now that we can reasonably be assured the health care bill’s cost is properly allocated and encumbered, let’s see how and where the revenue generating provisions will affect American taxpayers.

The largest single line item that will contribute to the funding of the health care legislation is a new surtax for Medicare.  Estimates that over $200 billion will be raised over 10 years, is a burden carried by only a small percentage of high income taxpayers, estimated at approximately the top 2% of all taxpayers, or those taxpayers who will earn more than $200,000 or $250,000 filing jointly. [5] This means approximately 98% of the population will not be required to contribute to the new surtax with regards to Medicare.

The new tax adds an additional .09% on earned income for those earning more than $200,000 or $250,000 if filing jointly. [6] The total employee contribution for those affected by the surcharge is 2.35%, while the employer’s tax will remain at 1.45%.  This new increase in tax on earned income is complimented by a hefty 3.8% tax on net investment income for those with AGIs (Adjusted Gross Income) over the $200,000/250,000 limit.  Net investment income in this context generally means interest, annuities, dividends, royalties, rents, and capital gains. [7]

The two surtaxes work together, in that not all high income earners will be subject to both taxes at the same time.  The 3.8% surcharge applies to the lesser of, the amount of investment income, or by an amount (if any) that “Modified Adjusted Gross Income” exceeds the income thresholds (i.e., $200,000/$250,000).   So for example, if a taxpayer has a modified adjusted gross income of $250,000, of which $20,000 is from investment income, the taxpayer will only be subject to the 3.8 percent tax on $20,000.  Also, in a second example, if a taxpayer’s modified adjusted gross income is $250,000, of which $200,000 is from investment income, the taxpayer would, under these circumstances, owe the 3.8% on $50,000, i.e., the amount of investment income that exceeds the income threshold.[8]

The new tax law relating to Medicare does not take effect until after December 31, 2012.

And as a holiday side note, if your spouse or someone you know is considering various plastic surgeries in the near future, consider the new Federal 5% “sales” tax on cosmetic elective medical procedures, effective this year, and collected at the source and time of the procedure. [9]

Tomorrow’s blogticle will continue to discuss the national health care legislation.

We invite your questions and comments by posting them below, or by calling the Panel of Experts

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[1] Pub. L. No. 111-148.  HR 3950.

[2] Pub. L. No. 111-152, HR 4782

[3] Letter to Harry Reid. Congressional Budget Office.  http://www.cbo.gov/ftpdocs/107xx/doc10731/Reid_letter_11_18_09.pdf.  November 18, 2009.  Last Accessed 12/15/2010.

[4] Joint Committee on Taxation.  Estimates Revenue Effects of the Amendment in the nature of a Substitute to H.R. 4872, The “Reconciliation Act of 2010,” In Combination with the revenue effects of H.R. 3950, The “Patient Protection and Affordable Care Act (‘PPACA’),” As passed by the Senate.   JCX-16-10.   http://www.jct.gov/publications.html?func=startdown&id=3671. March 18, 2010.  Last Accessed 12/15/2010.

[5] Joint Committee on Taxation.  JCX-16-10; Citizens for Tax Justice.

“Only 1% of Taxpayers Would Be Affected by Obama’s Proposal to

Increase the Social Security Payroll Tax for the Rich.”  http://www.ctj.org/pdf/obamasocsec20080707.pdf.  July 7, 2008.  Last Accessed 12/15/2010.

[6] Patient Care Patient Protection and Affordable Care Act, Section 9015, as amended by the Health Care and Education Reconciliation Act, Section 1402.

[7] Health Care and Education Reconciliation Act, Section 1402.

[8] Health Care and Education Reconciliation Act, Section 1402.

[9] Patient Protection and Affordable Care Act, Section 9017.

The co-chairs of President Obama’s Fiscal Commission released a preliminary proposal to reduce the deficit by $4 trillion through 2020. The plan would reduce the deficit to 2.2 percent of GDP by 2015, cap government spending and revenue at 21 percent of GDP, and ensure Social Security’s long-term solvency. Perhaps the most dramatic component of the plan is its proposal to completely overhaul the U.S. income tax system by reducing tax rates and eliminating the alternative minimum tax (AMT)—balanced by the elimination of many tax credits and deductions.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Congressional action on the income tax in Advisor’s Journal, see CBO Analysis Supports Extending Tax Cuts (CC 10-49).

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