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Retirees and Obama's Tax Plan


Many different groups feel they are being targeted by our president's plan to increase taxes and decrease deductions and don't like it, including retirees who make a lot of income from dividends and capital gains.

“Retirees will be the hardest hit with the Obama tax plan,” my client challenged me.

“No,” I replied. “He is throwing a broader net — for example hedge fund managers are also going to feel the sting.”

My client gruffly shot back, “But, they deserve it.”

Whatever the case, many different groups feel they are being targeted by our president’s plan to increase taxes and decrease deductions and don’t like it. Some retirees are in this group, especially those who make a lot of their income from dividends and capital gains.

Obama supports increasing the tax on dividends and capital gains, the very income that supplements any pension retirees may have. These increases are not across the board, but, instead, they are for the so-called “wealthy” by Obama’s definition. He includes in this category those who bring in $200,000 for a single filer and $250,000 for joint filers.

Currently, the top rate for dividends and long-term capital gains is 15%. Our president proposes that dividends should be taxed at the same level as ordinary income, which could be as high as 39.6%. Additionally, individual retirees with an adjusted gross income over $200,000 ($250,000 for joint filers) would have to pay a 3.8% Medicare tax surcharge.

Effectively, these taxes mean that retired seniors with greater investment income could be paying up to 43.4% on some of their dividends instead of the current 15%. The surtax is applied on the lesser of:

1. The amount the adjusted gross income (AGI) surpasses $200,000 for single filers or $250,000 for joint filers. (AGI is defined as gross income after adjustment for allowable deductions.)

2. Or net investment income above $200,000 for single filers or $250,000 for joint filers.

Long-term capital gains are in the same mire for retirees who depend on them. Now taxed at 15%, the rate could go up to a maximum of 20% with a tacked on 3.8% surcharge Medicare surcharge for high earners.

The proposed tax code is complicated and includes many considerations not portrayed above. A tax advisor needs to be engaged for a complete view.

Still, taxes for well-off retirees are likely to shoot up in the future. No wonder my client was fussed up.

For Further Reading:

Fiscal Cliff Solution for High Earners

Protect Against Tax Increases on Investment Income

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice