President Trump has wasted no time in taking aim at a number of measures implemented by the Obama administration. Chief among them is the Affordable Care Act (ACA), otherwise known as Obamacare. Joint research from the Urban Institute and the Robert Wood Johnson Foundation suggests that as many as 30 million Americans could lose their healthcare coverage if the ACA is repealed. For high-income investors, however, the end of Obamacare could bring a financial win.
What the ACA Costs the Wealthy
The Affordable Care Act is perhaps best known for mandating health insurance for the majority of taxpayers. There are two key provisions of the ACA, however, that directly affect high net worth individuals, including those who have investment income.
The first is the 0.9% “additional Medicare tax,” which applies to single filers earning above $200,000 and married couples filing jointly whose earnings exceed $250,000. This tax is assessed on higher wage earners on top of the existing 2.9% Medicare tax. The regular tax is paid in equal proportions (1.45% each) by employers and employees. Self-employed individuals are responsible for shouldering the full burden of the Medicare tax and any additional tax, if their earnings mandate it.
The other provision is the 3.8% net investment income tax. This tax applies to capital gains on investments and it follows the same income thresholds as the additional Medicare tax. Individuals who are exempt from paying Medicare taxes may still be subject to the net investment income tax if they have net investment income and their modified adjusted gross income is above those limits outlined above. (For more, read: Income Tax Basics for All Investors.)
How the ACA’s Repeal Would Benefit High Net Worth Investors
Taken together, those two provisions of the ACA add up to a larger tax bill for wealthy individuals who have investment income. A repeal of Obamacare, however, could put a significant amount of money back into their pockets.
An analysis by the Center on Budget and Policy Priorities has found that millionaires would stand to get an 80% tax cut if the additional Medicare tax and the tax on net investment income were to disappear. The average tax break for those earning more than $1 million annually would total just over $49,000.
Those earning between $500,000 and $1 million would also benefit, although on a smaller scale. These individuals would see their tax bill shrink, on average, by just over $4,100. At the other end of the spectrum, the top 0.1% of filers, meaning investors with incomes above $3.8 million, would average $195,000 in tax benefits through the elimination of these two taxes. Among the 400 highest earning taxpayers, the average tax cut would total no less than $7 million. (See: Are You in the Top One Percent of the World?)
President Trump’s push to repeal the ACA reflects a larger plan by his administration to overhaul the tax system. Specifically, he’s proposed streamlining the current tax structure from seven brackets to just three, with taxes being cut for almost every income level (see Trump's Upper-Middle-Class Tax Increase and Trump's Tax Plan Would Hit Single Parents the Hardest). Again, it’s the wealthy who would gain the most. The Tax Policy Center estimates that among one-percenters, the average tax cut would total nearly $1.1 million.
The Bottom Line
Whether President Trump will succeed in repealing the ACA is still a question mark. In January, the Senate adopted a budget resolution that would allow for the elimination of the additional Medicare tax and the net investment income tax without Democratic approval. In the meantime, investors should be considering the possible implications of an end to Obamacare on their portfolios.