2013 Obamacare Changes

Each year since 2010 portions of Obamacare have been implemented.  Next year is no exception and starting in January 2013 there are several revenue provisions that will impact many Americans by direct taxes, reduced tax benefits or indirect additional health care expenses.

• Itemized Deductions for Medical Expenses

Increases the threshold for the itemized deduction for unreimbursed medical expenses from 7.5% of adjusted gross income to 10% of adjusted gross income; but waives the increase for individuals age 65 and older for tax years 2013 through 2016.

• Flexible Spending Account Limits

Limits contributions to a flexible spending account for medical expenses to $2,500 per year, increased annually by a cost of living adjustment. The 35 million Americans who use a Flexible Spending Account (FSA) at work to pay for their family’s basic medical needs will face a new government cap of $2,500 (currently the accounts are unlimited under federal law). 

• Increased Tax Rate on Medicare

Increases the Medicare Part A (hospital insurance) tax rate on wages by 0.9% (from 1.45% to 2.35%) on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly. This is a direct marginal income tax hike on small business owners, who are liable for self-employment tax in most cases.

• Surtax on Investment Income

Creation of a new, 3.8% surtax on investment income earned in households making at least $250,000 ($200,000 single). This table below illustrates the new tax rates. These rates will become effective unless adjustments are part of a more comprehensive budget plan.
 

	Capital Gains	Dividends	Other*
2012	15%	15%	35%
2013+ (current law)	23.8%	43.4%	43.4%

While the increased tax rate on Medicare and investment income are geared toward the higher income brackets, the limit on flexible spending accounts and higher threshold for deduction of medical expenses are going to impact many Americans.

Bipartisanship Really Possible?

To those of you who may not believe that social mood matters to politicians, I bring to your attention the bipartisan press conference held today at the White House.  Because politicians are constantly running for office even if they have just been elected, policymakers respond to changes in social mood better than any other group. There is nothing like a quick 1,000 point drop in the Dow Jones Industrial Average over concerns about the impending "fiscal cliff" to bring players together in well-choreographed bipartisanship.  We shall soon find out whether or not this meeting was just for show or a more meaningful response to a very serious issue.

Unfortunately, as I mentioned last week, I am not optimistic that a compromise will be reached by the end of the year.  Raising taxes on the wealthiest Americans will generate an extra $100 billion in revenue.  Considering the government is running a trillion dollar deficit each year; where is the other $900 billion going to come from?  Higher taxes on the middle class?  Spending cuts? And according to the meeting today, this is all going to be accomplished by Christmas.  Sure is going to be an interesting few weeks! 

  

Election Results, More Of The Same

While I consider myself an independent with a rational viewpoint, conservative on fiscal issues and more moderate on social ones, this election showed just how polarized our country has become.  While the electoral vote was fairly one sided in favor of President Obama, the popular vote was much closer.  In the end nothing really changed - we have a Republican controlled House, a Democrat controlled Senate, and a Democratic President; same as it was on Tuesday morning.  Voters in general - regardless of party - just aren't happy with the way things are going in Washington.

There seems to be a notion that the markets declined this week because of the election results - a pure play between Obama and Romney's differing viewpoints on how to handle things - and the markets wanted Romney to win.  However, the economy, while definitely important, wasn't the main factor in this election.  Social issues, taxes, entitlement programs, the middle class, and foreign policy were also big components in the outcome.  The ideals of the country are changing and this may have an impact on how markets act in the future as well as how business leaders run their companies.

I am sure the Democratic leaders in both the House and Senate have to believe the election results are a mandate to raise taxes on the rich or at least close some loopholes.  With the Republicans in the House firmly against this, it seems that compromise is out of the question in the near term.  It's likely the markets are going to have to get panicky before a real deal gets done, similar to the bailout in the fall of 2008.  Unfortunately, I am not optimistic that a compromise will be reached by the end of the year.  I think an agreement will be reached but not until the new Congress comes into office in January.  Of course, it will take several weeks for some bill to be passed after new sessions begin. 

Taxes are likely going up to some degree and this is probably going to happen at exactly the wrong time.  Higher taxes of any kind in 2013 will most likely bring a US recession as the economy is just not growing fast enough.  At the same time, the cost of food and fuel will likely rise as central banks print more money to try to prevent the downturn.  This combination could bring about stagflation (inflation rises and growth slows) which is the least favorable type of investing environment.  Time to error on the side of being cautious.  The next few months are going to be interesting times indeed.