RMR Wealth Management Blog

Obamacare Tax Hikes May Just Be Getting Started - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, December 26, 2012

(originally written by Jill Fromer)


Next spring will be three years since Congress passed the health care overhaul but, because of a long phase-in, many of the taxes to finance the plan are only now coming into effect.

Medicare spending cuts that help pay for covering the uninsured have started to take effect, but they also are staggered.

The law's main benefit, coverage for 30 million uninsured people, will take a little longer. It doesn't start until Jan. 1, 2014.

The biggest tax hike from the health care law has a bit of mystery to it. The legislation calls it a "Medicare contribution," but none of the revenue will go to the Medicare trust fund.

Instead, it's funneled into the government's general fund, which does pay the lion's share of Medicare outpatient and prescription costs, but also covers most other things the government does.

The new tax is a 3.8 percent levy on investment income that applies to individuals making more than $200,000 or married couples above $250,000. Projected to raise $123 billion from 2013-2019, it comes on top of other taxes on investment income.

While it does apply to profits from home sales, the vast majority of sellers will not have to worry since another law allows individuals to shield up to $250,000 in gains on their home from taxation. (Married couples can exclude up to $500,000 in home sale gains.)

Investors have already been taking steps to avoid the tax, selling assets this year before it takes effect.

The impact of the investment tax will be compounded if Obama and Republicans can't stave off the automatic tax increases coming next year if there's no budget agreement.

High earners will face another new tax under the health care law Jan. 1. It's an additional Medicare payroll tax of 0.9 percent on wage income above $200,000 for an individual or $250,000 for couples. This one does go to the Medicare trust fund.

Donald Marron, director of the nonpartisan Tax Policy Center, says the health care law's tax increases are medium-sized by historical standards. The center, a joint project of the Brookings Institution and the Urban Institute, provides in-depth analyses on tax issues.

They also foreshadow the current debate about raising taxes on people with high incomes.

"These were an example of the president winning, and raising taxes on upper-income people," said Marron. "They are going to happen."

Other health care law tax increases taking effect Jan. 1:

•A 2.3 percent sales tax on medical devices used by hospitals and doctors. Industry is trying to delay or repeal the tax, saying it will lead to a loss of jobs. Several economists say manufacturers should be able to pass on most of the cost.

•A limit on the amount employees can contribute to tax-free flexible spending accounts for medical expenses. It's set at $2,500 for 2013, and indexed thereafter for inflation.


Millionaires Are Doing Roth Conversions Before The Fiscal Cliff Hits, Should You Too? - posted by Brian Mayer, RMR Wealth Magement, LLC

RMR Wealth Management - Thursday, December 20, 2012
(article orignally written by Ashlea Ebeling, Forbes Staff) 


Millionaires Are Doing Roth Conversions Before The Fiscal Cliff Hits, Should You Too?

With tax hikes around the corner, one of the year-end tax moves in millionaires’ playbooks is converting a traditional individual retirement account into a Roth IRA. It’s a way to fight upcoming tax hikes, whether or not we fall off the fiscal cliff. It could make your retirement a lot richer–whether you’re a millionaire or just have an IRA in the five figures.


Here’s a millionaire example, courtesy of Robert Keebler, a CPA in Green Bay, Wisc. and a Roth cheerleader. A 65-year-old farmer client in the 35% federal bracket (the top rate today) put North Dakota farmland in his IRA and hit oil, literally. He just got the land appraised for $1 million, and is converting the IRA to a Roth, paying the give-or-take $350,000 income tax hit out of other assets. “It’s a brilliant strategy,” Keebler gushes. “By doing this, he preserves his 35% income tax rate, and all future distributions will be income tax free.”


That’s the beauty of a Roth. If you anticipate higher taxes, you can lock in today’s rates. If the farmer had done the conversion before he struck oil, it really would have paid off because you pay income tax on the value of the IRA assets when you convert.


2012 Roth Ira conversions are on the list of potential tax strategies of more people than any year except perhaps in 2010, says CPA and lawyer Robert Carlson in his latest Retirement Watch newsletter. Before 2010, you could only do a Roth conversion if your income was $100,000 or less. When that income limit was lifted Jan. 1, 2010, there was a flood of Roth conversions.


Now folks are hustling again to do them by year-end in anticipation of looming tax hikes expected on Jan. 1. For high-income taxpayers (just how high is still being hashed out), the 35% rate could jump to 39.6%. Capital gains and dividends rates may go up too. Also, a new 3.8% surtax on investment income and a new 0.9% surtax on wages and self-employment income are scheduled to kick in for singles earning $200,000 plus and married couples earning $250,000 plus.


Need a rundown on conversion basics? A traditional IRA is usually funded with earned income that hasn’t yet been taxed. Investments grow tax deferred, and withdrawals are taxed at ordinary income rates. A Roth is funded only with after-tax dollars, but any withdrawals made after five years and past age 59 ½ are tax free.


That’s the beauty of a Roth. If you anticipate higher taxes, you can lock in today’s rates. If the farmer had done the conversion before he struck oil, it really would have paid off because you pay income tax on the value of the IRA assets when you convert.

Here’s a New Tax on Savings You Didn’t Know About - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Monday, December 10, 2012

(article originally written by Alan D. Viard)


Here’s a New Tax on Savings You Didn’t Know About


In the debate over the looming fiscal cliff, U.S. President Barack Obama often plays down any adverse economic impact from letting the 2001 and 2003 tax cuts expire for high-income Americans, claiming that the top tax rates would merely return to where they were during the Clinton years.


Unfortunately, the president’s claim is incorrect because he ignores the impending arrival of the unearned income Medicare contribution tax, which will further raise tax rates on income from saving.


Scheduled to take effect on Jan. 1, the tax, which was adopted as part of the 2010 health-care law, is a 3.8 percent levy on interest, dividends, capital gains and passive business income received by taxpayers with incomes exceeding $200,000 (or $250,000 for couples).


Because the new tax was added to the health-care law late in the process without congressional hearings, it received little attention at the time. With only a few weeks left before it takes effect, it remains largely unknown.


Its obscurity has allowed bizarre myths to circulate on the Internet -- despite what you may have read online, the tax is not a 3.8 percent levy on home sales.


One problem with the unearned income Medicare contribution tax is the name Congress chose for it, which is a triple misnomer. The income that will be subject to the tax isn’t unearned -- it is earned by savers who receive market rewards for delaying consumption and providing funds to finance business investment. Also, because the proceeds will be paid into the general treasury, the tax will have no financial link to Medicare. And, of course, the tax will be a compulsory payment, not a voluntary contribution.


Intricate Regulations

Another concern is the complexity of the tax, as demonstrated by the intricate proposed regulations the Internal Revenue Service has had to develop to carry it out. The regulations, which still leave a few implementation issues unresolved, and the accompanying explanation filled 42 pages of the Dec. 5 Federal Register.


The biggest issue, however, is the additional penalty the tax will impose on the savings that finance investment and fuel long-run economic growth. It’s true that relatively few Americans have high enough incomes to be subject to the tax. But they account for a large portion of what the nation saves, magnifying the economic impact.


IRS data for 2010 reveal that the 3 percent of taxpayers with incomes of more than $200,000 received 45 percent of the interest income, 58 percent of the dividends and 88 percent of the capital gains (net of losses). More taxpayers and more saving will gradually become subject to the unearned income Medicare contribution tax in coming decades because its income thresholds won’t be adjusted for inflation.


Even if the high-income portions of the 2001 and 2003 tax cuts are fully extended, the unearned income Medicare contribution tax’s arrival next year will raise the top rates on interest, dividends and capital gains 3.8 percentage points above this year’s levels. Or, if the high-income provisions are allowed to expire, it will push the top rates on interest, dividends and capital gains 3.8 percentage points above Clinton- era levels.

Even if we can’t repeal this tax, we should at least keep in mind its burden on saving as we decide the fate of the 2001 and 2003 tax cuts.


Finally, if we keep the unearned income Medicare contribution tax, we should give it a more accurate name. The IRS is now calling it the “net investment income tax.” I prefer to call it a “tax on income earned by savers.”

(Alan D. Viard is a resident scholar at the American Enterprise Institute. The opinions expressed are his own.)


BRIAN BELSKI: US Corporate Profit Margins Will Stay High For Years - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, December 05, 2012

(article originally written by Brian Belski)


BRIAN BELSKI: US Corporate Profit Margins Will Stay High For Years

BMO Capital Markets' Brian Belski published his 2013 Market Outlook yesterday. We already know that he expects the S&P 500 to end 2013 at 1,575. But this new 39-page report offers more color to his call. Here are some key points:

Multiple expansion will define next phase of investing, as opposed to multiple contraction
The investment cycle favors US stocks over bonds, high quality over low quality, and fundamental investing relative to macro investing
As a result, risk premiums are likely to fall
Earnings growth below historical averages, but will be of higher quality and more consistent
EPS forecasts for year end 2013: $106.25
Domestic recovery will help offset volatility from other regions in the world
Belski acknowledges that 2013 will be a year of low earnings growth. "Admittedly, we are forecasting relatively low rates of earnings growth for 2013 given our price forecasts," he writes. "Our reasoning is that the productivity well has all but run dry and current peak profit margins are set to decline, putting some downward pressure on earnings growth unless global demand picks up again."

But this doesn't mean profit margins will implode from record levels. Indeed, Belski believes the opposite, which is why he favors U.S. stocks for the long-run:

Stability and quality of earnings will enhance fundamental believability. A main reason we believe US stocks will outperform over the next few years is the significant and positive structural change that most US companies have successfully demonstrated over the past decade or so. While many investors focused on higher growth emerging market regions around the world and asset classes like commodities, a vast majority of US companies took advantage of declining and record low interest rates to shore up balance sheets and focus on cash flow generation. In addition, many of these same companies increased their productivity by minimizing cost structures. One result has been a dramatic improvement in profit margins, which are currently at peak levels (Exhibit 10, top).

Although we agree that peak margin levels are unsustainable, we do not expect any sort of significant drop from current levels. Based on our work, secular shifts in profit margins tend to last for decades, which makes sense because structural changes in the economy typically have a long-lasting impact on profitability. In addition, the tax and interest rate environments remain favorable. For instance, taxes paid as a percentage of total profits have fallen significantly (Exhibit 10, bottom), which likely reflects the fact that a higher share of revenue (and profits) is being generated from international markets where tax rates are lower. Furthermore, any corporate tax reform within the US is likely to set rates lower given that the US maintains one of the highest corporate tax rates in the world. Finally, the combination of lower leverage and interest rates has greatly reduced the interest rate burden of companies. True, interest rates are not likely to remain historically low forever, but they are not likely to rise significantly anytime soon.

Deutsche Bank's David Bianco made this same argument for profit margins earlier this year.

Here's the chart from Belski's report:




CHART OF THE DAY: The Average Person Is Absolutely Horrible At Investing

Just how bad is the average investor at investing?

According to BlackRock's chart of the week, they're so bad that they've managed to underperform every major asset class for the last 20 years. They've even underperformed inflation.

Volatility is often the catalyst for poor decisions at inopportune times. Amidst difficult financial times, emotional instincts often drive investors to take actions that make no rational sense but make perfect emotional sense. Psychological factors such as fear often translate into poor timing of buys and sells. Though portfolio managers expend enormous efforts making investment decisions, investors often give up these extra percentage points in poorly timed decisions. As a result, the average investor underperformed most asset classes over the past 20 years. Investors even underperformed inflation by 0.5%.

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