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Asset Testing – The Wealth Tax

One risk of being a high-income medical professional is that you will likely accumulate a lot of wealth. Since you can’t hide your wealth from the IRS, it is something which can be eventually taxed in the form of a wealth tax. To do this, asset testing is used to determine your net worth.

Imagine this scenario: you have worked your ass off replacing joints or performing root canals and have set aside $5M for your retired. Congress passes a new law just as you retire. It will tax anyone’s wealth past $2M. You’ll now be stuck paying annual taxes on the other $3M.

Will we have to deal with asset testing and a wealth tax in the future? If so, should we take that into account when accumulating money for retirement? Has the US ever passed tax laws affecting high income earning professionals?


Wealth tax

Here is what I found out when I researched wealth tax which I’ll share with you so you don’t have to google it yourself. Basically, wealth tax already exists in the rest of the world. Had no idea.

Sure, we sort have a wealth tax which physicians already pay – it’s called Additional Medicare Tax. But that’s income based and not asset based.

Canada has a wealth tax in the form of extra property taxes for those whose homes are worth more than $3M.

France apparently used to tax those who have a net worth north of €1.3M up until recently. They have now switched over to a real estate based wealth tax, similar to Canada.

Netherland has an interesting system. They don’t tax your wealth but what your wealth yields. If you’re invested in an asset which yields 5%, for example, they’ll take a portion of that.


The downside of a wealth tax

It’s not easy imposing and enforcing a wealth tax. First, congress would have to come up with a system which won’t piss off a lot of people. Historically, the high income earning employees have been easiest to tax.

Business owners are harder to tax because they need their money, supposedly, to invest back into their business. Businesses also employ people which helps fuel the economy. Congress fears taxing businesses because they have stronger lobby groups and the pushback often isn’t worth the headache.

Asset testing isn’t easy either. If you’re going to asset test a business, they can hire some good lawyers to hide their money any which way they like. Asset testing a high net worth medical professional isn’t hard. We aren’t going to have $1.5M in inventory sitting overseas. We will have a ton of equity in our homes and a massive retirement portfolio. Point, aim, shoot.


Asset testing

Asset testing isn’t only relevant to a wealth tax. Asset testing can also be used to curb government subsidies, determine tax brackets, and set annual property taxes. If a person has a high net worth then they might have to pay higher capital gains taxes, for example.

In the US as of 2019 capital gains taxes are based on your annual household income. It’s currently either 0% or 15% or 20% for long-term capital gains.

I’m a single dude in my 40’s. If my household income was up to $39,000, I would pay no capital gains taxes on my income as of 2019. Which means that if I have a portfolio of $1M and have long-term capital gains of $35,000 then I pay no taxes on that. I can put that $35k directly into my pocket.

Now imagine that Uncle Sam says that because I own real estate and because I have a net worth north of $1M I will need to pay a wealth tax of 5% on my capital gains. It would be very similar to AMT taxes – it’s an extra tax on top of your other tax.

Or it could be like the health insurance tax which we had to pay if we chose not to have health insurance. Americans tend to think that adding new taxes is difficult and yet examples are abound.

True, you can’t add new taxes affecting everyone. If your net worth or household income is below the median for the US, you will be protected every which way possible by congress. If you’re above it, you are at risk for a wealth tax after asset testing.


Flying under the radar

The easiest way to fly under the radar is to live on less. In every which way this strategy is a winner. You’ll enjoy a more robust lifestyle, you’ll expose yourself to less risk, and failing an asset test or getting slapped with a wealth tax is much less likely.

Owning a business and having diversified investments is also helpful.

I know I sound like a broken record but how likely is it that you’ll need $8M or even $5M to retire comfortably? Will it be worth it to work so hard for so many years to achieve that?

I am not aware of any imminent wealth tax other than the taxes I’ve already mentioned. I don’t know how I feel about a wealth tax; should a government disproportionately tax their population? Should you have some of your wealth taken away because you have more of it? If so, should you get something in return for this extra taxation?


2 replies on “Asset Testing – The Wealth Tax”

You are scaring me!
Everybody focuses on “rich people” as someone who makes a high salary. Maybe 250K or more.
Let’s keep it that way.
I won’t be able to sleep tonight. Thanks a lot.

It’s an interesting topic and hope it isn’t so much fear mongering rather a good point to consider. It’s unlikely that anyone with a $10M net worth will end up starving because of a wealth tax or suffer in their old age because of asset testing.
For anyone who is on the fence, maybe this potential spin on taxes might become a deciding factor. Partially I’m also looking for confirmation bias that my tiny savings will be more than adequate for my retirement and that I don’t need any more.

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