Baird’s Tim Steffen Offers Year-End Tax Planning Advice
MILWAUKEE, Oct. 15, 2013
“Those at the highest income levels (joint incomes of $250,000+) will be impacted by several new taxes,” Steffen said. Higher earners can expect to pay higher taxes due to:
- New top marginal tax rate of 39.6% for individuals earning more than $400,000 or couples earning more than $450,000.
- New top capital gains tax rate of 23.8% for individuals earning more than $400,000 or couples earning more than $450,000.
- New taxes to help pay for the Affordable Care Act: A Medicare surcharge of 0.9% on wages or self-employment income will impact those earning more than $200,000 individual/$250,000 joint. In addition, a new Medicare surcharge on investment income will impact those with Modified Adjusted Gross Income in excess of $200,000 for individuals or $250,000 for couples.
- The return of several income-based phase outs that will cause many to lose deductions or exemptions.
- Accelerate deductions into 2013: Deductions will be more valuable to higher earners this year. According to Steffen, “If you are expecting deductible expenses in early 2014, you may want to take them sooner.”
- Defer income: Taxpayers who have control over the timing of their income, such as business owners and some executives, may benefit by deferring income from 2013 into 2014.
- Consider the marginal impact of each transaction: According to Steffen, marginal tax planning is more important than ever. He encourages high earners to think about the ripple effect of transactions. For example, a large gain may not only be subject to the higher capital gains rate, it could push taxpayers over the income threshold to where they begin losing itemized deductions or personal exemptions. “Wealthy taxpayers could find that the cost of taking a gain is significantly more than they thought because it will reduce their deductions or require them to pay the new Medicare surcharges,” Steffen said. “Be sure to consult a tax advisor before pulling the trigger on a significant transaction.”
- Evaluate your estimated tax payments: To avoid getting hit with an underpayment penalty, individuals may have targeted paying 90% of their current year tax liability. Steffen encourages high earners to factor in the impact of new taxes on their estimated payments to avoid an unexpected tax liability and penalty.
- Keep extra cash available: Given that most high earners will need to pay more when they file their return in 2014, Steffen recommends keeping enough cash on hand to avoid having to tap illiquid investments at a bad time.
- Complete multi-year tax planning: “We strongly encourage high earners to consider their income and deductions over a longer period – at least two years – to make sure they are able to effectively manage their taxes,” Steffen said.
- With the Supreme Court ruling on the Defense of Marriage Act (DOMA), married same sex couples now must file a joint federal tax return for 2013. “Many of these couples will need to prepare for higher joint taxes due to the marriage penalty,” Steffen said.
- The lifetime estate tax exemption is now $5.25 million, or $10.5 million for couples. While the estate tax rate increased to 40% from 35%, the exemption is now set at a higher level. “After several years of uncertainty, the estate tax exemption is now set in stone allowing families the ability to plan,” Steffen said.
- Taxpayers can make gifts directly from an IRA to charity. This rule expired in 2012 and was reinstated early in 2013 retroactive to the prior year. Taxpayers who made a gift in January for the prior year will need to be careful not to double count that for 2013. The rule is set to expire again at the end of 2013.
- The annual exclusion, or the amount that may be gifted to an individual without incurring a gift tax, has increased to $14,000 from $13,000 for 2013. Couples are able to gift as much as $28,000.
- The floor on deductions for medical expenses was raised to only allow expenses that exceed 10% of AGI versus 7.5% in the past. This could impact more low and middle income earners.
- The 0% capital gains tax rate still applies for couples with taxable income below $72,500. According to Steffen, “Moderate earners who may have recently retired or been out of work during the year may want to take advantage of a low-earning year to take a capital gain.”
About Tim Steffen
As Director of Financial Planning for Baird’s Private Wealth Management group, Tim Steffen is a noted expert on the financial and estate planning needs of high-net-worth individuals. Prior to joining Baird in 1999, he worked in Arthur Anderson’s Private Client Services group where he specialized in tax and financial planning. He earned his bachelor’s degree in Accounting from the University of Illinois. Steffen is a Certified Public Accountant/Personal Financial Specialist, a CERTIFIED FINANCIAL PLANNERTM professional, a Certified Private Wealth Advisor® professional and a member of the American and Wisconsin Institutes of CPAs, the Financial Planning Association and the Investment Management Consultants Association. For more tax and financial planning tips and insights, follow him on Twitter @steffen_rwbaird.
Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has approximately 2,800 associates serving the needs of individual, corporate, institutional and municipal clients. Baird has more than $100 billion in client assets. Committed to being a great place to work, Baird ranked No. 14 on FORTUNE’s 100 Best Companies to Work For in 2013 – its tenth consecutive year on the list. Baird’s principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird’s investment banking and private equity operations. For more information, please visit Baird’s website at rwbaird.com.
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Baird Public Relations
Baird Public Relations