Wednesday, January 28, 2015

Tax planning tips for high-income earners

Llana Polyak for CNBC writes:  Accountants and financial advisors may be breathing a sigh of relief that there were no major new tax-law changes this year, but that doesn't mean they're happy about the higher taxes their clients are paying now compared to just a few years ago.
"Some clients whose situation did not change at all paid $6,000 or more in 2013 vs. 2012," said Jim Holtzman, a CPA and certified financial planner with Legend Financial Advisors.
Holtzman and other tax advisors expect more of the same, which is why they are being especially aggressive about managing the income-tax liability for their clients. There is less emphasis on estate taxes because the exemption—$5.43 million per person—is so high now.
But income taxes are higher. The top bracket is now 39.6 percent for people earning $400,000 as singles and $450,000 for married couples filing jointly.
High earners also pay a 3.8 percent Medicare surtax on their net investment income if their modified adjustable gross income is more than $200,000 for singles and $250,000 for married couples. And there's the 0.9 percent Medicare payroll withholding tacked on to the incomes of people earning $200,000 if single and $250,000 if married.
Even professionals' heads are spinning. "It's become so complicated," said CPA Lyle Benson of L.K. Benson & Co., who is also a CFP. "I have a little cheat sheet of all the different taxes at the different levels that I keep by the phone and refer to when I'm talking to clients."

Take a multiyear approach

Tax planning is better done looking out three or five years, noted Katherine Dean, managing director of wealth planning with Wells Fargo Private Bank. "If you see some sort of trend coming up—will there be an increase in income or a reduction in income—you can tailor your deductions or deferrals," she said.
For example, if your income is high this year and you expect it to increase in coming years because your career is on a roll, it's better to accelerate deductions when you can to offset some of those higher earnings through higher charitable contributions, prepayment of state income tax or selling securities at a loss.
Another option is to postpone some of that income, perhaps by maxing out 401(k) plan contributions or moving out the sale date of stock options into a year when you have less income.
"You want to ask yourself, 'Do I pull the lever [on deductions or income] now, or will I be in a better position to take advantage of them later on?'" Dean said. SNIP.  The article continues at CNBC, click here to continue reading...


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