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BAM Intelligence

Tax Tips for the Post-Cliff Era – Bill Morgan

Bill Morgan, Herbein Wealth Management, Wyomissing, PA

We did go flying over the fiscal cliff, but last minute tax legislation provided a gentle parachute landing. So with American Taxpayer Relief Act of 2012 now in effect, what can investors do to control their tax bill for 2013 and beyond?

For all the contention and conflict related to ATRA, its overriding impact was to maintain the status quo for most taxpayers. The legislation extended existing tax cuts for most Americans. Top earners will pay more in taxes, but that was the whole idea behind the deal that got through Congress — raising revenue without big tax increases for the middle class.

Yes, one tax increase does apply across the board. The 2 percent cut in workers payroll tax (FICA) was not extended, so we’ll all pay an extra 2 percent on our first $113,700 in wages to support Social Security.

Other than that, people making less than $200,000 to $400,000 (it varies for different provisions) will face the same general tax landscape as in 2012 — a maximum tax rate of 35 percent with a 15 percent tax on most dividends and long-term capital gains.

Many small steps
Given what’s changed and what hasn’t, what can taxpayers do to make sure their fair share of tax revenue stays reasonable?

Keep investing: Tax rates on capital gains and dividends are still much lower than on ordinary income. Take advantage of this favorable treatment on investments.

Be patient: Short-term gains are taxed like ordinary income. Hold appreciated assets for more than a year, if possible, before taking the gain. Keep this in mind when rebalancing your portfolio.

Trade less: Lots of buying and selling can produce lots of short-term capital gains. Reduce this possibility by limiting transaction frequency.

Put assets in right places: Take advantage of the wide variety of tax-favored savings and investment vehicles — 401(k), IRA, Roth IRA, Health Savings Account, 529 college savings plan, annuity and others.

Match asset types to accounts: Put the right kind of assets into tax-favored accounts. Investments that produce dividends and capital gains already benefit from lower tax rates, so use tax-favored accounts to hold investments that aren’t so tax efficient.

Pair gains and losses: Harvest capital losses when you have them to offset capital gains. You can also offset up to $3,000 in ordinary income with capital losses.

Let fund managers help you: Use tax-managed mutual funds that use intentional buy and sell rules to reduce short-term capital gains and maximize long-term capital gains.

Take credits: Education credits are still available to help offset the cost of college education. Be sure to use them if you’re eligible.

Know what’s deductible: Whether it’s medical expenses, investment fees or interest payments — knowing what’s deductible and keeping accurate records during the year will reduce your tax bill.

Give from your IRA: If you’re over 70½ consider charitable contributions direct from your IRA. Special tax treatment may save you money.

Think ahead: If you plan to give money to children, start while you are alive. Let them start investing and reduce your own dividend income and capital gains. Your children may be able to take advantage of lower tax rates that you can’t.

Be generous: If your estate is more than $5.25 million, consider giving some of the excess away each year. Otherwise, it will be taxed at up to 40 percent upon your death. Gifts of up to $14,000 to an unlimited number of people are allowed annually.

For high earners
High earners face higher marginal tax rates plus an increase in tax on investment income. And deductions and exemptions are being cut for high-income taxpayers too. These are significant changes making it even more important to take advantage of everything else described above.

Taxes are complicated. Many limits, exceptions and special rules may apply. Now more than ever, working with an advisor who understands your entire financial picture is the best way to reduce taxes.

Best case tax scenarios depend on planning ahead. Discuss all aspects of your situation and applicable tax rules with your advisor early in the year. You don’t want to be looking back on April 15, 2014 and hearing your advisor say, “If only I knew, we could have helped you to cut your taxes.”

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

©  2013, The BAM ALLIANCE

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As a wealth advisor, Bill helps clients build and implement a holistic financial plan engineered for their specific financial situation. He works with a team of other professionals to monitor, update and execute wealth management strategies in pursuit of his clients’ wealth transfer, retirement and tax objectives.

For Bill, the most rewarding aspect of working with clients is easing clients’ worry of financial decision-making so they can enjoy the best times in life and achieve their financial goals. That starts by leveraging his experience in individual taxation, using the information gathered at each visit to provide tax planning suggestions, which in turn offers a very positive tangible result: lower taxes.

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