9 Savvy Tax Moves for Right Now


Effective January 1 2013, there is an additional 3.8% levy on unearned net income for individuals making more than $200,000 or married couples with joint incomes of more than $250,000.

Fortunately there is some planning that can be done to minimize the surtax. Take advantage of any opportunity to convert “passive income” to active income – for example by being very actively involved in real estate investments so that you are classified as a “real estate professional” or by investing in growth stocks and tax free muni’s. Timing matters, too: Consider when to realize gains, perhaps focusing on years when earned income falls below the threshold - such as during the year of a job loss or in retirement.


There’s an additional 0.9% Medicare payroll tax for high earners, taking the Medicare levy to 2.35% from 1.45%. Although the tax is applied to incomes of more than $200,000 for individuals and more than $250,000 for married couples filing jointly, some high earners may be taxed even if they don’t reach the cutoff. The reason: In order to comply with the provision, payroll departments have been advised to begin tacking on the additional 0.9% for married employees making more than $200,000 because there’s no way for employers to know how much the spouse makes even if, ultimately, that employee is not subject to the tax.  Make sure that your withholdings are neither too high (resulting in interest-free loans being made to the IRS / FTB) nor too low (causing penalties and interest charges).


With the arrival of a new high-end tax bracket, the top marginal rate for the highest earners has jumped to 39.6% from 35%. To keep taxes down, you’ll want to focus on adjusted gross income and find as many above-the-line deductions - technically “adjustments” - as possible.  Contributions to a 401(k) or 403(b) plan (which can top out at $17,500 following a 2013 limit increase, and more for those age 50 and older) will reduce a client’s adjusted gross income. Other items that fall into this category are moving expenses, health savings accounts and expenses listed on Schedule C forms for self-employed clients.


Bundle as many deductions into the current year, because the value of those deductions is greater at the higher tax rate is attractive. Prior to 2010, itemized deductions were phased out for those who topped certain thresholds. The phase-outs were allowed to expire through 2012, but they’re back now as a de facto “stealth” tax.

The phase-out limits taxpayers’ ability to fully deduct charitable contributions, for instance, starting at $300,000 adjusted gross income for married filing jointly and $250,000 for single filers - both thresholds that are less than where the highest tax bracket kicks in.

For taxpayers whose adjusted gross income exceeds those upper limits, the itemized deductions (not including medical expenses, investment interest, casualty or theft losses or allowable gambling losses) will be reduced by the lesser of 3% of adjusted gross income in excess of the threshold amount, or 80% of the itemized deduction otherwise allowable for the tax year.


Also changing this year is the threshold at which you can deduct medical expenses, which is now 10% of adjusted gross income, up from 7.5%. Bunching up discretionary medical costs and elective procedures makes sense. Remember that a corporate medical reimbursement plan makes every medical expense (broadly defined) fully deductible.


Asset allocation is critically important – but so is asset location. Assets that generate taxable income, and are therefore tax inefficient, are best held in tax-deferred vehicles like 401(k)s and IRAs. Investments with significant capital appreciation, however, can reside in taxable accounts because rates on long-term gains are only rising to 20% (or 23.8% for high earners, with that Medicare surtax), and because you can usually control when to realize those gains.


Take advantage of the annual gift-tax exclusion, now $14,000 per recipient. Even with the gift exemption locked at $5 million, the gift-tax exclusion can help a high-net-worth client move even more assets out of an estate. “A married couple with 10 grandchildren has the ability to gift $280,000 a year,” says Jonathan Gerber CPA,  a   tax partner at Gerber & Co CPAs in Los Angeles.. Education payments aren›t subject to the gift tax if made directly to an institution – so for those who are so inclined, gifting can be done in addition to paying tuition.


Here’s how a GRAT works: An individual sets up and funds a GRAT for a certain number of years. The funds are invested in any way the owner wishes. Each year, the owner must take a certain amount of money out of the trust as an annuity. The IRS assumes the GRAT will grow at a given rate, and sets it monthly for new GRATs. (Currently a meager 1.2%). Anything the trust earns beyond that can be passed on to beneficiaries free of gift taxes.  Note that if you die before the expiration of the trust, the remaining money must be added back into your estate.


The last three years were a unique opportunity for anyone considering a Roth conversion. Without income limits, high earners could convert traditional IRAs into Roths, paying income tax up front, but at a historically low rate. In exchange, they could let their accounts grow tax-free and have tax-free withdrawals in the future, a time when tax rates will most likely be higher. On top of that, the markets’ rise over the last few years has eased the conversion pain, in many cases making back the money that account holders paid in taxes.

The new higher tax rates do make the Roth less attractive- but don’t rule out Roths even now. Further, a Roth can be done piecemeal over a number of years, depending on a client’s cash flow and marginal tax rates. For clients who don’t qualify for a Roth contribution due to income restrictions, there is a “back door”: Make a yearly contribution to a nondeductible IRA, and then convert almost immediately to a Roth. Bear in mind that, by waiting too long, clients run the risk that the account has appreciated and may owe some tax. Remember that  a Roth conversion carries little risk because the IRS allows taxpayers to recharacterize a conversion within 18 months if the assets decline in value. Very few tax moves give you this window to undo them retroactively.

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