The ObamaCare Tax Hike on Investors

by Mark Skousen

A massive and complicated tax hike on investors is inevitable this January 1, and it has nothing to do with the current debate about a fiscal cliff…

ObamaCare tax hikes start kicking in on January 1, and they have an immediate impact on investors.

Remember that we investors worked long and hard to enjoy the tax breaks we earned in 2001 (the Bush tax cuts): a maximum tax rate of 15% on qualified dividends and long-term capital gains – the lowest in my lifetime.

And now the 15% rate is going up in smoke on January 1. ObamaCare imposes a 3.8% surtax on all dividends, interest and capital gains for households making at least $250,000 ($200,000 single). That includes passive income from partnerships and sub S corporations.

The surtax is expected to generate $123 billion in government revenue over the next 10 years.

But as the late Larry Abraham used to say, “There never is a tax law without legal loopholes.” The surtax doesn’t apply to municipal bond interest or life insurance proceeds, active trade or business income, fair market value sales of ownership in pass-through entities, or distributions from retirement plans. Nor does it apply to income or gains inside an IRA or 401(k) plan. The 3.8% surtax doesn’t apply to non-resident aliens.

If Congress and the President don’t come to an agreement by January 1, 2013, things get really crazy and tax rates become extremely complicated and go much, much higher….We’re talking rates as high as 45% just on the federal level (not counting state taxes)!

On January 1, the Bush tax cuts automatically expire. Three bad things happen to investors: the top federal rate goes from 35% to 39.6%, the 15% rate on dividends and capital gains is over and a clawback of itemized deductions comes back. The effect of the clawback is to add 1.2 percentage points to the marginal tax rate of an upper-middle-class investor. Got that?

The bottom line is you could end up paying a 44.6% federal tax on dividend and interest income. With a change in the tax law, the rate for capital gains will be split into three tiers in January, pushing the rate on long-term gains to 25%.

I won’t go into all the awful details; hopefully Congress and the President will see the light and make the Bush tax cuts permanent. If the House Republicans hold to their guns and refuse to increase taxes, there could be a stalemate and a big sell-off on Wall Street.

Many investors see the writing on the wall, and are selling in December. The good ol’ tax breaks for investors are history.

But the best advice is from Judge Learned Hand: “There’s nothing sinister in so arranging one’s affairs as to keep taxes as low as possible.”

Take advantage of all the loopholes you can. Consider buying Municipal bonds. I recommend BlackRock MuniEnhanced Fund, Inc. (NYSE: MEN), yielding 5.2%, and BlackRock MuniVest Fund, Inc. (NYSE: MVF), yielding 6.1%.

Or tax-deferred annuities. For more information on those, call David T. Phillips & Co., Chandler, Arizona, 1.888.892.1102, or email

Good Investing, AEIOU,


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