Repealing and replacing the Affordable Care Act (Obamacare) has become a top priority for the Trump administration and the Republican-controlled Congress. This controversial desideratum appears to be a higher priority than the general tax reform proposed by the president (discussed in an article on myStockOptions.com).
Earlier this month, the House of Representatives passed the American Health Care Act (AHCA), its second attempt to repeal and replace Obamacare (the first effort failed in March). To be enacted, the legislation must still be adopted by the Senate, where changes are expected. For details on the bill, see a special report from CCH.
The AHCA would eliminate the Net Investment Income Tax: a 3.8% Medicare surtax on investment income, including capital gains, dividends, and interest. Meanwhile, an amendment to the House bill would delay until 2023 the repeal of the Additional Medicare Tax (0.9%) on ordinary income (see Sections 213 and 251). Those taxes currently apply to everyone with yearly modified adjusted gross income (MAGI) of more than $200,000 (individuals) or $250,000 (married joint filers). The AHCA would also eliminate the $500,000 limit on the corporate deductibility of compensation for officers, directors, and employees at health insurers.
The important debate over health care and public policy raised by the Obamacare repeal is beyond the scope of myStockOptions.com. It is our role, however, to acknowledge the effect that the law's repeal would have on the taxation of stock compensation.
Impact On Withholding For Stock Compensation
As explained in detail by an FAQ on myStockOptions.com, the tax provisions in question both directly and indirectly affect stock plans and individual tax planning, so you will want to follow the related developments. Currently, under the associated IRS guidelines (starting at Question 33), companies must withhold the 0.9% additional Medicare tax on any type of pay, including that from stock compensation (e.g. NQSO exercise or RSU vesting), when an employee's wages for the year are more than $200,000. While the legislation would remove that requirement, it would not do so until after 2022.
Impact On Tax Planning With Stock Compensation
The 3.8% Medicare surtax on investment income also can be triggered by stock compensation (though you pay the surtax with your tax return rather than through withholding). For example, an exercise of nonqualified stock options or a vesting of RSUs could push your MAGI over the related income thresholds. If you were to sell shares in the same year, your income would then trigger the 3.8% surtax on top of the capital gains tax (15% or 20%) on the investment income from the stock sale. We have found that people with stock comp and their financial advisors often develop strategies to avoid the surtax. If it is eliminated, that planning concern would go away.
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