By: Henry VanBuskirk, CFP®, Wealth Manager
As a lifelong California citizen, I’ve had the opportunity to enjoy our state’s beaches, mountain trails, and diverse cuisine. However, all of these niceties come at a price that we Californians refer to tongue in cheek as the “Sunshine Tax”. The “Sunshine Tax” of course isn’t an actual tax, but our collective understanding as Californians that our state government levies one of the highest state income taxes in the nation so that we can have nice things in exchange for living here.
A quick glimpse at this infographic shows why it’s no surprise that we’ve seen an uptick in financial planning for clients looking to relocate out of California in favor of lower-income tax states like Arizona or to states with no state income tax like Nevada. When we have those conversations with clients as to why they want to leave California, they often cite financial, political, and/or personal reasons for the move. We’ll often hear from clients, “California just seems to be inventing new taxes to impose on its citizens and they aren’t using the tax money wisely enough anyway. We’re tired of dealing with it, so we’re moving to a different state.” While those clients are sometimes bringing politics into that statement, I’m not going to be discussing politics here. I will instead be hiding in my metaphorical bunker waiting for a cease-fire in this current political tribalistic war before stepping on that social landmine. You may say that day may never come, but we like to think with our glasses half full here.
In all seriousness, I do however want to examine the first part of that statement “California just seems to be inventing new taxes to impose on its citizens” and discuss the proposed long-term care payroll tax between 0.5% – 1% of income (no specific range has been actually given) that has been floating around news outlets this year. This rumored tax is supposedly waived if you are able to prove that you already have sufficient long-term care insurance coverage through an existing insurance policy. Our state is only getting older, and we’ll need to fund the rising cost of healthcare somehow. It would make sense that rumors of a new tax to fund it would be circulating. However, is there any truth to these rumors? If true, how would this long-term care payroll affect you? Keep reading to find out.
Long-Term Care Insurance
Long-Term Care is an umbrella term for medical or non-medical services rendered for people who aren’t able to care for themselves. A person would be deemed qualified for needing long-term care services if they cannot do 2 out of the 6 activities of daily living, which are defined by the National Institute of Health (NIH) on their website as:
Long-term care costs are not covered by Medicare and because of that, people may buy private long-term care insurance or have a set amount of money in their financial plan dedicated to possible future long-term care costs. California’s long-term care costs are higher than the national average:
As you see from this chart, long-term care isn’t cheap. This is why we must account for it when working on a client’s financial plan. California’s population is aging, but is still younger relative to the national average according to the Public Policy Institute of California (PPIC):
All of this framework is to describe why California proposed in Bill 567 as currently amended to start a Long-Term Care Insurance Task Force to determine if a state program funded through payroll taxes would be feasible and if so, how much this tax would be.
The Proposed Long-Term Care Payroll Tax
To be clear, there has yet to be any legislation stating how much this tax would be or that there even would be a tax at all. As of this writing, the Long-Term Care Insurance Task Force is still assessing the feasibility of a state program and if they would recommend a tax to be implemented. This recommendation for action or inaction by the state legislature to implement or not implement a state-run long-term care insurance program funded through payroll tax has to be given to Governor Newsom by January 1, 2024, and this deadline may be extended.
Remember when I mentioned that this tax (if it even gets enacted) can be waived if you already own a long-term care policy or similar insurance coverage? This is also just a rumor. However, this hasn’t stopped shady insurance brokers from trying to sell questionable policies to people who may not need them as a way to avoid this deadline. Here is an example sales pitch:
Ms. Insurance Broker: I’m from ABC Insurance company and I am reaching out to my higher-earning clients in California to make sure that they are aware of California’s plan to start implementing a long-term care insurance payroll tax of 1% starting in 2024. Are you aware of this?
Ms. Client: No, I’m not aware. Please enlighten me.
Ms. Insurance Broker: Well, California is making a long-term care insurance payroll tax of 1% that is meant to fund a state program that you can use for future long-term care insurance needs. I would like to present you with an opportunity to buy a whole life insurance policy with a long-term care benefit that will circumvent this new law. Based on your health, we can get you a $50,000 death benefit for a premium of $500 per year. The new law is 1% of your income. Since you make $200,000, that would mean you are paying $2,000 per year into a state-run long-term care insurance program that you may or may not ever need. With this insurance policy, you can protect your loved ones, circumvent the new law, and have a long-term care benefit if you do ever need it.
Ms. Client: I’m 31 and single with no debt, why would I need permanent life insurance?
Ms. Insurance Broker: For you, it’s to save money on the long-term care tax. In your case, you’re saving $1,500 per year and getting life insurance with it.
Ms. Client: I’ll need to think about it. Thank you for reaching out.
The California Department of Insurance not only frowns on this type of sales tactic but also stresses how it is illegal to do this because nothing has been implemented into law. You can read that press release from the California Department of Insurance condemning that behavior here. As for the client in the example, this happened to one of my family members. This, along with clients coming to me with similar questions, was the motivation for me to write this blog. As for my family member, I told her to politely tell “Ms. Insurance Broker” to go take a hike.
The Proposed Program, Its Impact on You, and What We Recommend Now
Since the program is only just a proposed program, we don’t recommend doing anything at this time. If you are retired, there still isn’t anything to worry about from what we know about the proposed program since it will be funded through payroll taxes. If you are still working, be cognizant of shady insurance brokers trying to sell you on what our state legislature may do rather than on what they have already signed into law. Don’t get out over your skis and buy something that may or may not be in your best interest.
If something does get passed into law, it means that we’ll need to account for this payroll tax when we do financial planning for California clients. If nothing gets passed, we still have to be aware of the rising cost of long-term care and its impact on our clients’ financial futures. In any case, this at least brought to light the importance of having an unwavering long-term care plan in place. If discussing long-term care leaves you on shaky ground because the question of “how are you going to fund potential long-term care costs” leaves you with more questions than answers, give us a call at 714-282-1566 or email us at financialplanning@bfsg.com to schedule a consultation with our team of Certified Financial Planners™ professionals that can craft you a comprehensive financial plan to help put your mind at ease.
Sources:
- https://taxfoundation.org/data/all/state/state-income-tax-rates-2023/
- https://www.ncbi.nlm.nih.gov/books/NBK470404/
- https://pro.genworth.com/riiproweb/productinfo/pdf/282102.pdf
- https://www.ppic.org/publication/californias-population/
- https://www.insurance.ca.gov/0500-about-us/03-appointments/ltcitf.cfm
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