* 3.8 percent tax on investment income starts in 2013
* Complex tax code gives flexibility to tax planners
By Kim Dixon
WASHINGTON, Sept 7 Tax planners are developing
w ays to help well-to-do U.S. clients avoid the full impact of
taxes set to take effect next year under President Barack
Obama's healthcare overhaul.
With some legal uncertainty still surrounding the new
levies, advisers are devising methods for high-income taxpayers
to shelter investment and other forms of income.
Obama's healthcare law imposes a 3.8 percent tax on
investment income and a 0.9 boost in payroll taxes, both
applying only to individuals earning more than $200,000 a year
or households earning more than $250,000.
That is about 4 percent of the tax-paying population,
according to the non-partisan Tax Policy Center.
Among ways these taxpayers might be able to avoid the full
brunt of the new taxes: cashing in gains this year instead of
next; characterizing income as active instead of passive; and
moving profits into vehicles or structures not subject to the
tax, said a range of tax experts.
"It is a brave new world for all of us," said Robert
Spielman, a partner at accounting firm Marcum LLP.
The strategies under development underscore the complexity
of the 70,000-page tax code and the time and effort devoted to
finding ways to comply with it while minimizing payments.
For every tweak in the code that comes along, legions of
accountants and lawyers go to work devising work-arounds,
supporting an enormous tax planning industry.
At the center of the tax industry is the U.S. Internal
Revenue Service, which has yet to spell out in regulations
exactly how the new healthcare taxes will be applied.
"We are all kind of waiting for it collectively," said
Garrett Fenton, an attorney at law firm Miller Chevalier.
Cloudier sections of the law include how the taxes apply to
certain profits of private equity managers, real estate
investors and partnerships, according to tax professionals.
More clarity from the IRS is unlikely to come before the
Nov. 6 presidential and congressional elections, some observers
PAYING FOR HEALTHCARE
Combined, the new taxes are expected to raise about $210
billion over a decade to help fund the healthcare law, which
aims to expand insurance coverage to 32 million Americans.
No matter who wins the presidential election, the taxes will
kick in in January. Even if Republicans capture the White House
and both houses of Congress, they would have an uphill climb
repealing what they derisively call "Obamacare" because the
Senate would likely still be closely divided.
As a result, at least in the near term, the 3.8 percent tax
is on track to be assessed on top of the existing 15 percent tax
rate on income from capital gains, dividends and other
investments for the $200,000-in-income-and-up set.
The tax applies to investment income from dividends,
interest, annuities, royalties and rents - except for income
earned in the ordinary course of a trade or business.
That includes defining activities as "passive" and whether
income is from a "trade or business" involving trading in
financial instruments and commodities.
It only gets more complicated from there.
For example, in law firms or real estate partnerships, a tax
adviser might say that distributions, even if they enjoy the
lower capital gains rate, are exempt from the 3.8 percent tax
because of the way the law is written.
In such a case, Karen Field, a principal at accounting firm
KPMG, said she would argue the 3.8 percent tax does not apply.
Board members are asking tax advisers if they should take
income this year to avoid the 3.8 percent tax, according to
Michael Mundaca, co-director of national tax services at
accounting firm Ernst & Young and a former tax adviser to Obama.
With tax rates potentially rising across the board, plus the
3.8 percent tax looming, "that might be enough to get people to
pull the trigger" on accelerating gains into 2012, Mundaca said.
PRIVATE EQUITY, EXECUTIVE PAY
Gray areas exist in how the 3.8 percent tax might apply to
the income of private equity managers, an area of heightened
attention because Romney co-founded Bain Capital, one of the
most profitable private equity firms around.
Taxes paid by private equity managers are already
controversial, as managers pay the lower capital gains rate on
most of their profits, a benefit that helped keep Romney's tax
rate below 15 percent in 2010.
"The tricky part is how you characterize the person
providing the service," said Spielman. "It is a nightmare."
Another area perplexing some tax experts is how the
healthcare taxes will apply to deferred compensation plans used
by the upper echelon of corporate executives to stash away
unlimited amounts of compensation and defer taxes.
The healthcare law exempts some deferred compensation plans
available to more employees, but it is silent on executive
plans, leaving an open question as to whether the investment
build-up in such plans may be subject to the 3.8 percent tax.
"It is hard to say one way or the other," Fenton said. "An
argument could be made they are similar to investment earnings,
but a strong following says no."