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Integrated Wealth Management

Get Ready For Year-End Tax Planning

Potentially significant tax increases await us in 2013. The elimination of the “Bush tax cuts” will result in higher federal tax rates for income, capital gains, and dividends (unless Congress enacts new legislation). In addition a new 3.8% surtax will hit some high-income investors.

Employers will also be required to withhold additional amounts from the wages of high-earning employees when the Medicare tax rate will increase by 0.9% (from 1.45% to 2.35%) on wages over $200,000 for single filers, wages over $250,000 for joint filers, and wages over $125,000 for persons married, filing separately.

By making some astute moves, you may be able to maximize the tax benefits under current laws and minimize future tax increases.

New Federal Tax rates with 3.8% Medicare Surtax

A top bracket taxpayer who has $100,000 of additional investment income (taxed at 43.4%) would pay $43,400 of federal taxes on that income in 2013 – compared to $35,000 in 2012.

If proposition 30 passes, California taxpayers with joint incomes above $500,000 will pay an additional 1% in state tax, an additional 2% on incomes above $600,000 and an additional 3% on incomes above $1,000,000. These income levels are $250,000, $300,000 and $500,000 for single filers.

It may be best to wait to make any final tax planning decisions until after the election, to see if the lame duck Congress can forge a compromise and extend the Bush tax cuts. Assuming rates rise, the following strategies may be beneficial for higher income taxpayers.

  • Accelerate income into 2012 by taking a larger IRA distribution than required, exercising employee stock options or paying yourself more from your corporation if you own one.
  • Delay deductions until 2013.
  • Delay charitable contributions until 2013.
  • Sell assets. You might decide to sell appreciated investments, property like rental real estate, or other assets in 2012. This could help you avoid both higher tax rates on capital gains and the 3.8% surtax. Of course, any asset sale also needs to make sense from a financial and tax perspective.
  • Convert a regular IRA to a Roth IRA. By converting before the 3.8% surtax hits in 2013, you may reduce the overall tax bite.
  • Make tax-deductible retirement plan contributions, whether to IRAs, 401ks or defined benefit pensions. Contributions help bulk up your retirement nest egg and can substantially reduce your tax burden.
  • After 2012, consider gifting investment assets to low-income family members. The future income will not be subject to the 3.8% Medicare surtax unless the family member’s income exceeds $200,000 single/$250,000 married. And the income and future appreciation will now be out of your estate and off of your tax return.

These are just several ideas to reduce the impact of higher taxes. We can work with your tax advisor to help you plan steps that make sense for your situation. One final note – be sure you and your advisors analyze the effect of the Alternative Minimum Tax (AMT) on any planning strategy you may be considering.