Poof! A Planned Tax Break for Investors Just Vanished

Mar 27, 2017

When the Republican healthcare plan failed last week, it wasn't just Obamacare opponents who lost out. Well-heeled investors hoping for a big tax break on their investment gains also stand to be disappointed.

Here's why. While Obamacare was funded by a slew of different tax hikes, the single largest was a 3.8% surcharge on qualified dividends and long-term capital gains, which is currently owed by anyone making $200,000 or more ($250,000 for couples). That extra tax pushed the rate for long-term capital gains and qualified dividends to 18.8% from 15% for anyone earning $200,000 to $418,400 per year, and to 23.8% from 20% for those earning more than that.

The GOP's health plan would have eliminated the tax, along with a similar 0.9% Medicare surtax and a slew of other levies, while simultaneously trimming healthcare subsidies to make up for the roughly $600 billion, which the net investment income tax is expected to bring in over the next decade.

Of course, Republicans are still planning to cut taxes. They could theoretically decide to attack the net investment income tax as part of a broader effort to overhaul the tax code, which party leaders have said will be the next item on their agenda.

In a news conference Friday, however, House Speaker Paul Ryan appeared to close that avenue off. "Obamacare taxes stay with Obamacare. We're going to fix the rest of the tax code," he said.

For disappointed investors, there is a silver lining. The centerpiece of the tax overhaul proposed by House Republicans last fall -- although complicated by a concept known as "border adjustability" -- boils down to a tax cut on corporate earnings, which is designed to reduce the top 35% rate to 20%.

In other words, while a tax cut for investors' dividends and income has gotten less likely, Republicans are no less determined to ease the tax burden for shareholders. The main difference: A corporate tax cut would slash the government's take in corporate profits at the time they are earned, while the tax cut on dividends would have targeted them when they are paid out to stockholders.

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