Bone up—for your clients’ financial health

Nancy Pelosi, former speaker of the House, famously declared that Congress had to pass the health care reform bill “so you can find out what’s in it.” Now that the Supreme Court has upheld the constitutionality of the law, financial planners and investment advisers need to study it thoroughly, if they haven’t already done so. The financial welfare of many of their clients will be affected by the provisions of the law.

The most obvious provision of concern is the 3.8% surtax on investment income for couples with adjusted gross income of more than $250,000 a year and $200,000 for single filers. The tax will apply to dividends, capital gains, rents, royalties, interest (other than that from municipal bonds) and some annuity income.

This surtax means that the tax rates on dividends and long-term capital gains will increase to 18.8%, from 15%. Taxpayers in the top bracket could be expected to pay as much as 43.8%, counting the surtax and the reversion to the Clinton era tax rates that would be imposed if the Bush tax cuts expire Dec. 31.

MARKET MOVER

Clearly, advisers should be telling clients to consider accelerating investment income into this year to avoid the higher rates.

Of course, the new tax rates likely will affect the capital markets, and these effects also must be considered. The new rates reduce the after-tax return of dividends and capital gains, while leaving unaffected the returns on tax-exempt muni bonds.

If the Bush tax cuts expire, and the rate on dividends goes up, many investors likely will sell dividend-oriented equities, pushing down the prices of those stocks, and move into growth stocks and/or muni bonds.

Firms might also be tempted to cut their dividends and return money to shareholders in the form of capital gains through share buybacks.

Given that the fate of the Bush tax cuts is unclear, advisers will have to pay close attention to Congress and be prepared to act decisively near year-end.

Investment advisers must be thoroughly familiar with the provisions that will affect investments so they can guide their clients.

The law obviously will affect companies in the health care sector. It imposes a 2.3% excise tax that will be levied on the total revenue of a company, regardless of whether it generates a profit, starting next year. Many companies will owe more in taxes than they generate from their operations.

The tax could kill small medical-device makers and stifle innovation, but it might spark mergers and acquisitions as profitable firms buy small ones and their devices.

IMPORTANT PROVISIONS

Meanwhile, the 2,700 pages of the law have many provisions that will affect businesses large and small. For example, businesses employing 50 people or more will be assessed a fee of $2,000 per full-time employee (in excess of 30 employees) if they don’t offer coverage and if they have at least one employee who receives a premium credit through a health insurance exchange.

Employers with 50 or more employees that offer coverage but have at least one employee who receives a premium credit through an exchange are required to pay the lesser of $3,000 for each employee who receives a premium credit or $2,000 for each full-time employee (in excess of 30 employees).

Planners and advisers will have to guide their small-business clients as to when it makes sense to hire more than 49 employees, when it makes sense to offer health insurance and when it makes sense to pay the fine.