Saturday, April 27, 2013

Advisers, Clients Plan For Next Tax Season

Arden Dale for the Wall St. Journal writes: For a lot of taxpayers, tax season doesn't end on April 15.  Soon after sending off their returns and other documents to the Internal Revenue Service, many people start right back again planning for the next tax season.
Financial advisers have already stepped in this year, post Tax Day, to help clients estimate taxes for their upcoming quarterly payments, amend their returns, adjust their tax withholding on IRA distributions, and much more.
Bernard M. Kiely, an adviser in Morristown, N.J., with $55 million under management, has three clients he will help file tax returns on extension. Two are waiting for K-1 statements from partnerships and trusts.
"The third is an elderly gentleman who takes his time to get the paperwork together," Mr. Kiely said.
While many tax advisers take a break after April 15, others stay busy preparing for the upcoming tax season.
For example, one of the two accountants adviser Eve Kaplan works with throughout the year "was on the first flight out of New Jersey on April 16 for a vacation--not an atypical travel pattern for the CPAs," said Ms. Kaplan, in Berkeley Heights, N.J., who manages $30 million.
The other accountant, however, has emailed Ms. Kaplan post-April 15 about a client who wanted to close a certain investment account. The man didn't grasp the large tax hit that would follow. Because he owned investments in the account for less than a year, ordinary income tax rates would apply, not lower capital-gains rates.
In fact, taxes are never far from Ms. Kaplan's thoughts.
"I work quietly in the background on an ongoing basis to generate tax harvesting opportunities throughout the year in order to lower the taxable investment income my clients pay," she said.
Katherine Dean, managing director of wealth planning at Wells Fargo Private Bank in San Francisco, said estimating taxes will be a harder task this year for wealthy people because of new, higher income tax rates and a 3.8% surtax on investment income. Many advisers and their clients have already started the process to understand the new yet unfamiliar tax regime.
What's not so complicated to figure out: The next quarterly payment for estimated taxed is due on June 17. Taxpayers with adjusted gross income above a certain amount--$150,000 for 2012--pay 110% of the total tax shown on their prior year tax returns in estimated taxes.
This month, Ms. Dean said, her group has talked with corporate executives about whether to defer income in their compensation plans in light of the higher income tax rates. The alternative minimum tax complicates these talks in some cases, however.
The AMT replaces personal exemptions and some deductions, including the standard deduction and that for state and local taxes, with an AMT exemption ($50,600 for individuals and $78,750 for married, filing jointly, for 2012). It applies tax rates, 26% on the first $175,000 and 28% on any over that, to the resulting AMT taxable income.
AMT rules are complicated, and tax advisers consider AMT planning especially challenging. Some kinds of stock options are taxed under the AMT, while others aren't, for example. The same goes for certain investments, including some kinds of bonds.
Figuring out whether a client would be better off in a given year to pay the AMT or the regular tax can be counterintuitive. The AMT uses a lower tax rate, which can be a boon in certain years for some taxpayers. But AMT payers also may pay more because of the deductions the AMT eliminates.
"Having that conversation is important, but they tend to get stuck there," said Ms. Dean. "That's where we loop in the accountant to run some illustrations."


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