By Arden Dale at arden.dale@dowjones.com (Wall St. Journal) For wealthy taxpayers, two things are certain in 2013: They'll pay more in taxes and face a more complicated tax-planning regime. Under the fiscal-cliff deal stuck this week, the wealthy and their financial advisers now will have to navigate more rules than ever. The law ties key tax rates to a new level of wealth, and sets separate income thresholds to limit deductions for the rich and to levy a new investment tax."There are more parts now," said economist Roberton Williams of the Tax Policy Center, a nonpartisan group in Washington, D.C. Already, some advisers say they plan to be more active throughout the year in helping their clients manage when to take income and deductions. At Pittsburgh advisory firm Waldron Wealth Management, for example, advisers will redouble efforts to spot the best times to take capital gains or losses and make charitable deductions, said Michael Krol, a financial planner at the firm.
"It becomes all the more important," said Mr. Krol, who will weigh other details, too. These include, given new limits on deductions, whether it makes more sense for a client to take the mortgage interest deduction or pay off the mortgage with a loan and deduct the loan interest.
James H. Guarino, an accountant and certified financial planner at MFA--Moody, Famiglietti & Andronico LLP in Tewksbury, Mass., said it's now critical that individuals be able to estimate their taxable income before the end of the calendar year to do strategic tax planning.
The most basic change advisers face is the definition of who is wealthy. The top brackets for income, capital gains and dividend taxes now kick in at a new income threshold--$400,000 ($450,000 for joint filers) of taxable income. But a new 3.8% Medicare surtax on investment income, including capital gains and dividends, applies to individuals with an adjusted gross incomes of $200,000 ($250,000 for joint filers).
The two sets of thresholds mean some wealthy clients will be subject to the surtax on investments, while others are not. And, because the surtax--mandated under the Affordable Care Act--isn't indexed to inflation, it will apply to more people each year.
Deductions, too, are now more complicated. After a hiatus of two years, rules to limit tax write-offs by the rich are in effect again. Three income thresholds apply to these limits, known as the Personal Exemption Phaseout (PEP) and the Limitation on Itemized Deductions (Pease): $250,000 of adjusted gross income for individuals, $275,000 for heads of households, and $300,000 for joint returns.
In the midst of all the change, a few things will stay the same, and make life easier. The estate tax exemption, set at $5 million last year after a series of changes over the past decade, will remain the same. The alternative minimum tax is now tied to inflation, eliminating last-minute battles to keep it from applying to millions more people.
Sorting it all out will take a while. Like many others, Laura Sundquist, a certified public accountant with Sage Financial Design Inc. in Simsbury, Conn., is wading through the details.
"I like to get my tax letter out to clients in the first week of January but that may not happen because I have to understand it first," she said.
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