Darla Mercado for InvestmentNews.com writes: It's probably too late to do any significant planning for the 2013
tax year, but right now is the perfect time to get a jumpstart on 2014. Tax gurus note that the top earners — singles with taxable income over
$400,000 and married joint filers with income over $450,000 — will be in
for a nasty surprise when they confront the 2013 federal tax bills
they'll pay in April. They face a top marginal income tax rate of 39.6%
and a top marginal tax rate of 20% on long-term capital gains.
The
American Taxpayer Relief Act of 2012, enacted close to a year ago, put
in place the net investment income tax of 3.8% on annuity income,
royalties, dividends and other sources of investment income, as well as
the additional Medicare tax of 0.9%. Those levies will affect
individuals making upward of $200,000 in modified adjusted gross income
and married joint filers with over $250,000 in income.
There have also been phaseouts on personal exemptions and itemized deductions: The so-called PEP and Pease.
“The
filing of these 2013 tax returns is going to be an eye-opening
experience for many of these clients,” said Gavin Morrissey, vice
president of wealth management at Commonwealth Financial Network
It's all the more reason to start laying the groundwork for 2014.
First
and foremost, there's the net investment income tax: the 3.8% levy that
applies to the amount by which the taxpayer's modified adjusted gross
income exceeds $200,000 (if single) or the taxpayer's net investment
income — whichever is lesser.
“This 3.8% surtax needs a lot of
attention. That means placing more emphasis on portfolio design,” said
Robert Keebler, a partner with Keebler & Associates. Kick off the
new year by looking at clients' portfolio holdings. Advisers should aim
to reduce turnover and look into using statutory shelters, such as life
insurance, real estate and master limited partnerships to minimize the
tax hit.
Roth conversions will still be in vogue during the 2013
tax season. These conversions require an upfront tax payment, but income
from the Roth IRA will be tax-free in the future. “You can still jump
on that right out the gates in 2014,” Mr. Keebler said. In fact, jumping
on that conversion right away makes sense because the client is
maximizing the amount of time for the market to do its work. You have
until Oct. 15, 2015, to undo the Roth conversion, which means the client
has a year and ten months to watch the market, Mr. Keebler said.
High-net-worth
clients who make significant charitable donations may want to consider
front-loading a donor-advised fund in the new year. Given the new steep
capital gains taxes and the fact that the market appreciated
considerably over the course of last year, making a sizable gift of
appreciated stock in January will give the client a considerable
charitable deduction.
“Let's say you give $5,000 a year to a
charity and you have a stock position with a basis of $25,000 — but it's
now worth $50,000 because of the appreciation over the last two years,”
said Mr. Morrissey. “If you put in the $50,000 in appreciated stock
into a donor-advised fund, you're frontloading it for the next 10 years,
and you have a nice income tax deduction that you can use today.”
Finally,
certain high earners might want to manage their income stream in order
to keep themselves from drifting into higher tax brackets. Mr. Morrissey
noted that if someone gets paid in stock options, perhaps they can
defer them into later years when their income won't be as high. This
might make sense if the individual projects that he or she will have a
big income year and can have control over when and how that income is
received.
“These clients might be getting close to retirement and
don't want to trigger all this income at the same time, so they're
looking for ways to defer income and stay below their thresholds,” Mr.
Morrissey added.
Tuesday, December 31, 2013
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