Despite protests from insurance groups, the health care reconciliation act will add a new tax on annuity income to pay for Medicare once the bill becomes law.
Several insurance groups issueda last-minute appeal in a letter to legislators on Wednesday to exempt annuities from the new tax, citing the important growing role annuities are playing in securing retirement. But annuitiesremained in the reconciliation bill the Senate and House passed on Thursday and sent to President Barack Obama to sign.
The 3.8 percent tax applies to investment income from married individuals filing a joint return and surviving spouses with taxable income of at least $250,000; married taxpayers filing separately with an income of $125,000; and other individuals, with an income of $200,000.
The bill lists annuities as investment income. The tax would apply to annuity income that is already taxable (the amount above the annuity owner’s cost basis), starting in 2013. Annuities sold in employer-sponsored retirement plans would be exempt.
The Congressional Budget Office estimated the overall tax on investment income will generate $210 billion over 10 years to pay for Medicare, said George Burke, American Council of Life Insurers (ACLI)spokesman.
The ACLI was one of the several groups that sent the letter to legislators to cut the tax, which was first proposed in Obama’s health care proposal, which was released in late February to help break the health care reform impasse. The proposal caught industry advocates by surprise because it had not been part of previous negotiations in the House, Burke said. Another surprise was not only its quick acceptance but also an increase in the rate.
“It was introduced as a 2.9 percent tax and got bumped up to 3.8 during negotiation,” Burke said. “The whole thing was relatively quick from when it was introduced to when the bill was passed.”
Other investment income includes interest, dividends, royalties, rent, "passive" income and income from a business trading in financial instruments or commodities.
Now that it will be law, the association is working with members to determine the impact.
"Will it dissuade people from buying annuities? We don’t know yet,” Burke said. “What concerns us is the president touted the value of annuities as a retirement savings tool and on the flip side they’re going to tax it.”
Editors Note: To be fair, the tax is levied on all investment income, including annuities. Exempting annuity income would have been a change in the law, although there may be good reasons to treat the income differently.
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