Financial Planning for April, 2010

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How Health Care Law Will Affect Your Financial Planning

Now that President Obama has signed sweeping health care changes into law, every American needs to determine how the new rules might affect their financial planning. Many of the changes do not take place until 2014. LetÂ’s take a look at how some of the new lawÂ’s provisions will affect your financial planning.

As discussed in this monthÂ’s Tax and Accounting News, there are several new taxes affecting individuals. Foremost among those is the increase in the Medicare tax, which is slated to add more than $200 billion in taxes over the next 10 years. Beginning in 2013, you will need to account for the effect of that on your budget if your income exceeds certain levels. Expect to pay an additional 0.9 percent in taxes if you are a high-income earner. If you have unearned income and your adjusted gross income exceeds a threshold amount, expect to pay an additional 3.8 percent of that unearned income for Medicare taxes.

As a result of these changes, individuals, estates and trusts will need to evaluate their current sources of income and, if possible, seek ways to recharacterize income to the type that carries lower tax burdens.

The increase in the threshold amount for deductible medical expenses will negatively affect those who itemize deductions. In the future, premature withdrawals from IRAs for health care costs also will be more costly as a result of the increase in threshold from 7.5 percent of adjusted gross income to 10 percent.

Availability of Insurance

One of the key stated purposes of the new health care law is to ensure that all Americans have access to quality, affordable medical care. In the past, insurance companies have routinely denied coverage for pre-existing conditions. By removing those exclusions for children almost immediately and adults in several years, the theory is that all Americans will have access to health insurance. Theoretically, this could positively affect you if a sizable portion of your income is used to pay health care costs for a sick child or for yourself.

For example, you have a child with special needs who must have very specific high-cost care for life. As a parent, you worry not only about providing for your child now, but also when you are gone. This becomes a significant factor in your financial planning. If pre-existing conditions are taken out of the mix, your current and future health care costs could be reduced. This leaves you free to concentrate on other financial planning needs, such as retirement.

Good or Bad

Anytime significant legislation is enacted, there is a potential for unintended consequences to be set in motion. The new health care law will certainly give rise to some of those. We have not yet begun to address the effect that repealing the Bush tax cuts in 2011 will have and how this might affect your investment decisions. Between the new taxes under the health care law and the repeal of the Bush cuts, we could be in for a wild financial planning ride in the foreseeable future. Whether the effects of the new law will help or hinder most of us in our planning remains to be seen, but it is now more imperative than ever to take a look at your financial plan and sit down with your financial and tax advisors to ensure you meet your goals.

Enjoy the Easter holiday.


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