Your Tax Planning Punch List / Rate changes, phase-outs, and limitations / Consider these strategies to help you make the most of it all.

Rebecca Weaver, Partner, PwC, US writes:   While you were deep into Day One of your 2013 New Year’s resolution, numerous federal income tax changes took effect. Now, months later, and as the tax filing year draws to an end, it’s time to figure out which of those changes may affect you. The end of the year is also prime time for planning to maximize tax benefits and minimize tax burdens going forward. And, in case you’re asking why so much change? I’ll tell you—a combination of laws passed as part of the Affordable Care Act (ACA) and others to address the fiscal cliff as we began the new year.

Below are changes that are important to consider in your year-end tax planning and when you file your 2013 tax return.

Rates Shifted

Understanding rate changes from 2012 to 2013 is a significant part of tax and investment planning (figure 1).

	HIGHEST 2013 MARGINAL TAX BRACKET (ADJUSTED)	TOP INCOME TAX RATES	AMT EXEMPTION	STANDARD DEDUCTION	PHASE LIMITATIONS	LONG-TERM CAPITAL GAINS AND QUALIFIED DIVIDENDS*
Joint returns or surviving spouse	Over $450,000	39.6%	$80,800	$12,200	$300,000	20%
Head of household	Over $425,000	39.6%	$51,900	$8,950	$275,000	20%
Single individuals	Over $400,000	39.6%	$51,900	$6,100	$250,000	20%
Married filing separately	Over $225,000	39.6%	$40,400	$6,100	$150,000	20%
Estates and trusts	Over $11,950	39.6%	$23,100	N/A	N/A	20%
* Taxpayers with income less than the highest 2013 marginal tax brackets will be subject to a 15% tax rate on long-term capital gains and qualified dividends unless they are in the 10% and 15% ordinary income tax brackets. If so, the rate is 0% subject to the “kiddie tax.” Taxpayers with AGI in excess of $200,000 (unmarried filers and heads of households) or $250,000 (joint filers) are subject to an additional 3.8% tax on investment income.

FIGURE 1: Table shows the impact, by type of filer, of the latest rate changes, including changes to long-term capital gains and qualified dividends. Source: PwC, IRS.

A few highlights:

• The 39.6% rate reflects the expiration of the 2001 and 2003 tax cuts, in addition to tax law changes resulting from the fiscal cliff legislation and the ACA; the latter introduced a 3.8% Medicare contribution tax on certain net investment income.
• For people in the highest tax bracket, the overall tax rate associated with interest, dividends, short-term capital gains, and passive income bumped up to 44.6% in 2013, reflecting the combined effect of the 3.8% tax, phase out of itemized deductions, and the expiration of the current tax cuts.
• For qualified dividends, expiration of the tax cuts and enactment of the fiscal cliff legislation has caused the tax rate to rise from 15% to 20%, on top of which there will be the 3.8% net investment income tax for most high-income taxpayers.

Investment Impact

Understanding more key rates and limits is important to achieving your overall wealth management goals. Follow these for 2013 filing:

• Alternative Minimum Tax (AMT): Married filing separately: 26% up to $89,750, 28% on $89,751+; all others 26% up to $179,500, 28% on $179,501+.
• Net Investment Income Tax (NIIT): The NIIT is imposed at a flat rate of 3.8% on net investment income.
• Personal exemptions: $3,900.
• Qualified plan contribution limits: 401Ks at $17,500; Simple IRA at $12,000 (if age 50 or over, an additional $2,500), defined contribution at $51,000; IRA at $5,500; SEP-IRA at lesser of $51,000 or 25% of compensation.

Steps For Now And Later

Considering tax-law changes is important in evaluating potential investment opportunities and actions as well as their effect on your wealth management goals and their impact on your federal income tax liability. This includes year-end tax strategies to pursue. Typical year-end strategies may include the deferral of income and acceleration of expenses that can enhance cash tax savings.

STRATEGIES TO INCREASE DEDUCTIONS

• Consider accelerating sizable charitable contributions to 2013.
• Analyze the benefit of accelerating or deferring deductions, taking into account the alternative minimum tax and the 3% haircut on itemized deductions. For example, should I pay state estimated tax payments and real estate tax payments in 2013 or 2014?
• For self-employed individuals, consider paying expenses for 2014 in 2013.
• If you are in a net operating loss position in 2013, consider foregoing the carry back period and carrying the loss forward to 2014.
• In your business adventures as an individual, consider placing assets in service in 2013 vs. 2014 to take advantage of bonus depreciation.

STRATEGIES TO DEFER INCOME

• Time Roth IRA conversions before or after 1/1/2014 depending on your overall tax picture.
• Take full advantage of retirement plan contributions.
• Utilize opportunities to accumulate assets in qualified plans.
• Diversify portfolios—offset gains and losses.
• Utilize installment sale opportunity when possible.
• Exercise stock options (2013 or 2014), keeping in mind investment considerations.
• Make 83b elections on restricted stock.
• Defer bonuses into 2014.
• Self-employed individuals defer billing and collecting to 2014.

Remember: Effective tax planning requires that you and your tax advisor pay attention to rates, types of income, phase-outs, limitations, and more. So, yes, it’s important to stay on top of moves in Washington. But don’t limit yourself to chasing rule changes. Tax planning can be most beneficial with a long-term view in mind, and not in high-pressure filing season.