For advisers, managing taxes will require more work this year than most. To begin with, the usual approach to estimating taxes--based on what one paid the year before--won't be enough in many cases. New rates and brackets, a 3.8% surtax on investment income and other changes complicate the planning process.
"Using last year's figures may give advisers a base to start with, but for higher income clients, estimating their 2013 tax liability is going to be more of a challenge," said Todd Perry, an adviser at Vintage Financial Services, an Ann Arbor, Mich., firm with around $275 million under management.
Most taxpayers know about the changes Congress made to the tax code starting this year, but few grasp the practical realities, advisers say. A couple with an adjusted gross income over $250,000, for example, may not realize that they will owe the 3.8% tax on top of capital gains and other investment income.
Advisers want their clients to understand the basics: Adjusted gross income of $200,000 ($250,000 for joint filers) triggers the 3.8% surtax--which is mandated under the Affordable Care Act to help fund Medicare. Taxable income over $400,000 ($450,000 for joint filers) gets the new top rate of 39.6% for ordinary income. And deductions also are limited for those with adjusted gross incomes over $250,000.
Paula Hogan, an adviser in Milwaukee, Wis., who owns her own practice with around $200 million under management, said she is getting ready to resend a client bulletin on the new tax regime she originally sent right after Congress approved it in January.
For most clients, she said now is a good time to adjust estimated taxes--either by selling stock or making a charitable deduction. She recommends clients ask their financial advisers to "tee up" conversations with an accountant or they should reach out to one on their own.
Recently, Ms. Hogan performed some fairly detailed tax planning for a couple whose daughter plans to be married in the spring of 2014. The pair decided to wait until next year to draw money from their portfolio to help pay for the event. Doing it this year would put them into a higher tax bracket.
Mr. Perry of Vintage Financial said he has prepared a number of mock tax returns for clients with severance packages or big capital gains. Most of them have been surprised at how many changes there are this year.
Some clients, he said, have tried to integrate the rule changes into their tax planning on their own, but come to see they need help. A bank executive and his wife, for example, brought Mr. Perry a rough estimate they had done of their 2013 taxes using standard software. A job change and a new salary along with stock sales had made the year eventful for them from a tax standpoint.
"He's heard about some of the changes, and I think was being a bit more proactive," said Mr. Perry, who did a detailed analysis that found the couple will have to pay more in taxes because of a sizeable capital gain from the stock sales that puts them into the top bracket.
Even accountants and other tax professionals have a challenge to keep up with all of the changes.
For example, Bill Fleming, a managing director at PricewaterhouseCoopers Private Company Services practice, said tax professionals still are awaiting guidance from the Internal Revenue Service on exactly how to apply the 3.8% tax to individuals who own their own businesses.
"How do we actually calculate the 3.8%? It's a whole new standalone tax," he said.
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